The Contagion Effect of Foreclosed Properties
John P. Harding
University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies
Federal National Mortgage Association (Fannie Mae) - Research
Vincent W. Yao
Federal National Mortgage Association (Fannie Mae); American University
July 28, 2008
Journal of Urban Economics, Vol. 66, No. 3, pp. 164-178
Although previous research shows that prices of homes in neighborhoods with foreclosures are lower than those in neighborhoods without foreclosures, it remains unclear whether the lower prices are the result of a general decline in neighborhood values or whether foreclosures reduce the prices of nearby non-distressed sales through a contagion effect. We provide robust evidence of a contagion discount by simultaneously estimating the local price trend and the incremental price impact of nearby foreclosures. At its peak, the discount is roughly one percent per nearby foreclosed property. The discount diminishes rapidly as the distance to the distressed property increases. The contagion discount grows from the onset of distress through the foreclosure sale and then stabilizes. This pattern is consistent with the contagion effect being the visual externality associated with deferred maintenance and neglect.
Number of Pages in PDF File: 42
Keywords: Foreclosure, Contagion
JEL Classification: G12, G21, R31
Date posted: July 17, 2008 ; Last revised: September 17, 2010
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