How Do Foreclosures Exacerbate Housing Downturns?

Timothy McQuade and Adam Guren
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Timothy McQuade: Stanford University

No 40, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We present a dynamic search model in which foreclosures exacerbate housing busts and delay the housing market's recovery. By raising the seller to buyer ratio and making buyers more selective, foreclosures freeze the market for non-foreclosures and reduce price and sales volume. Because negative equity is necessary for default, foreclosures can cause price-default spirals that amplify an initial shock. To quantitatively assess these channels, the model is calibrated to the recent bust. The estimated amplification is significant: foreclosures exacerbated aggregate price declines by 60 percent and non-foreclosure price declines by 24 percent. Furthermore, policies that slow foreclosures can be counterproductive.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-ure
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: How Do Foreclosures Exacerbate Housing Downturns? (2020)
Working Paper: How Do Foreclosures Exacerbate Housing Downturns? (2019)
Working Paper: How Do Foreclosures Exacerbate Housing Downturns?
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