An Alternative Approach to Estimating Foreclosure and Short Sale Discounts

James N. Conklin, N. Edward Coulson, Moussa Diop and Nuno Mota

Journal of Urban Economics, 2023, vol. 134, issue C

Abstract: Current research documents astonishingly large price discounts for foreclosures and short sales. However, such outsized estimates may largely be due to omitted variables bias. We propose an innovative methodology relying on appraisers’ ability to match properties along both observable and unobservable attributes when performing appraisals. Our empirical approach, which relies on the use of appraisal fixed effects, produces foreclosure and short sale discounts of approximately 5% after controlling for a rich set of characteristics, including quality and condition, attributable mostly to the stigma associated with distress itself. We show that these lower estimates are not due to appraisers selecting high-price distressed properties as comps and are robust across a wide variety of subsamples and under alternative estimation methods.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juecon:v:134:y:2023:i:c:s0094119023000153

DOI: 10.1016/j.jue.2023.103546

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