Spillover Effects of Foreclosures on Neighborhood Property Values

36 Pages Posted: 29 Nov 2007 Last revised: 7 Jan 2015

Zhenguo (Len) Lin

Hollo School of Real Estate, Florida International University

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business

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.

Keywords: Foreclosure, Spillover, Valuation

Suggested Citation

Lin, Zhenguo (Len) 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: https://ssrn.com/abstract=1033437

Zhenguo Lin (Contact Author)

Hollo School of Real Estate, Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
3057799248 (Phone)

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research ( email )

16517 Keats Terrace
Derwood, MD 20855
United States

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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