Foreclosure externalities: New evidence
Kristopher Gerardi (),
Paul Willen and
Vincent Yao ()
Journal of Urban Economics, 2015, vol. 87, issue C, 42-56
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juecon:v:87:y:2015:i:c:p:42-56
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