Abstract

http://ssrn.com/abstract=1033437
 
 

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Spillover Effects of Foreclosures on Neighborhood Property Values


Zhenguo Lin


California State University, Fullerton - Department of Finance

Eric Rosenblatt


Federal National Mortgage Association (Fannie Mae) - Research

Vincent W. Yao


American University


Journal of Real Estate Finance and Economics, Vol. 38, No. 4, May 2009

Abstract:     
Previous studies have shown that foreclosure often results in vandalism, disinvestment and other negative spillover effects in the neighborhood. This paper extends these views into a formal theoretical model through pricing based on comparables. We project that the spillover effect of a foreclosure on neighborhood property values depends on two factors: the discount of foreclosure sale and the weight placed on the foreclosed property as a comparable in the valuation. The former is related to housing cycle and the latter varies by time of foreclosure and its distance from the subject property. Empirical results based on a 2006 sample show that this effect is significant within a radius of 0.9 km (roughly 10 blocks) and within 5 years from its liquidation. The most severe impact is an 8.7% discount on neighborhood property values, which gradually drops to anywhere between −1.2 to −1.7% for foreclosures liquidated within the past 5 years. These spillover effects vary slightly when the sample selection bias is taken into account. Based on an alternative sample of purchase transactions in 2003, the estimated spillover effects in booming years are reduced by half, confirming on the important role played by housing cycles.

Number of Pages in PDF File: 36

Keywords: Foreclosure, Spillover, Valuation

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Date posted: November 29, 2007 ; Last revised: September 14, 2010

Suggested Citation

Lin, Zhenguo and Rosenblatt, Eric and Yao, Vincent W., Spillover Effects of Foreclosures on Neighborhood Property Values. Journal of Real Estate Finance and Economics, Vol. 38, No. 4, May 2009 . Available at SSRN: http://ssrn.com/abstract=1033437

Contact Information

Zhenguo Lin (Contact Author)
California State University, Fullerton - Department of Finance ( email )
Fullerton, CA 92835
United States
6572787929 (Phone)
HOME PAGE: http://business.fullerton.edu/finance/zlin/
Eric Rosenblatt
Federal National Mortgage Association (Fannie Mae) - Research ( email )
16517 Keats Terrace
Derwood, MD 20855
United States
Vincent W. Yao
American University ( email )
4400 Massachusetts Ave, NW
Washington, DC 20016
United States
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