The Foreclosure Discount: Myth or Reality?

45 Pages Posted: 12 Jan 2010 Last revised: 14 Nov 2015

See all articles by John P. Harding

John P. Harding

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Date Written: September 29, 2011

Abstract

Foreclosed properties sell at lower prices than do nearby non-distressed properties. Of particular concern, is whether there is a “stigma” foreclosure discount whereby REO properties sell at lower prices simply because they have been involved in foreclosure proceedings. To the extent that such a discount exists, arbitrage opportunities exist and the associated market failure has significant policy implications. We examine the foreclosure discount from a different perspective than prior researchers by comparing holding period returns earned by purchasers of REOs with those earned by purchasers of similar non-distressed properties. Our results show that the majority of REO purchasers do not earn economically significant excess returns. On average, the implied market discount is less than typical transaction costs. We also find evidence that REO properties and buyers vary systematically from their counterparts in the non-distressed market segment and that REO attribute prices differ from those of non-distressed properties. Overall, our evidence suggests that the market for REOs operates efficiently: lenders are not irrationally dumping REO properties and REO investors are not reaping extraordinary profits.

Keywords: Foreclosure Discount, Distressed Borrower, Bargaining, Valuation

JEL Classification: G12, G21, R31

Suggested Citation

Harding, John P. and Rosenblatt, Eric and Yao, Vincent, The Foreclosure Discount: Myth or Reality? (September 29, 2011). Journal of Urban Economics, Vol. 71, 2012, 2, p. 204-219.. Available at SSRN: https://ssrn.com/abstract=1534966

John P. Harding (Contact Author)

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies ( email )

2100 Hillside Road
Unit 1041RE
Storrs, CT 06269-2041
United States
860-486-3227 (Phone)
860-486-0349 (Fax)

Eric Rosenblatt

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

16517 Keats Terrace
Derwood, MD 20855
United States

Vincent Yao

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

35 Broad Street
Atlanta, GA 30303-3083
United States

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