Foreclosure externalities: New evidence

Kristopher Gerardi, Eric Rosenblatt, Paul Willen and Vincent Yao

Journal of Urban Economics, 2015, vol. 87, issue C, 42-56

Abstract: Policy makers have used externalities to justify government intervention in the foreclosure process. Using a new dataset that covers 15 of the largest metropolitan statistical areas in the U.S. and a novel identification strategy, this paper provides new evidence on the size and source of these externalities. Our results show that a property in distress affects the value of neighboring properties from the time when the borrower becomes seriously delinquent on the mortgage until well after the bank sells the property to a new owner. Properties with seriously delinquent loans within 0.1miles are found to decrease transaction prices of non-distressed properties by approximately one percent on average. The spillovers are found to dissipate rapidly with distance and completely disappear one year after the bank sells the property to a new homeowner. Importantly, we find that the size of the externality is sensitive to the condition of foreclosed properties, as bank-owned properties in poor condition lower nearby transaction prices by 2.6% on average while those in good condition marginally raise prices. We argue that the measured price spillovers are physical externalities caused by a lack of property maintenance and not pecuniary externalities that reflect local supply or demand shocks.

Keywords: Foreclosure; Mortgage; Externalities (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (94)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0094119015000170
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:juecon:v:87:y:2015:i:c:p:42-56

DOI: 10.1016/j.jue.2015.02.004

Access Statistics for this article

Journal of Urban Economics is currently edited by S.S. Rosenthal and W.C. Strange

More articles in Journal of Urban Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().