Foreclosures, House Prices, and the Real Economy

Abstract

From 2007 to 2009, states without a judicial requirement for foreclosures were more than twice as likely to foreclose on delinquent homeowners. Comparing zip codes close to state borders with differing foreclosure laws, we show that foreclosure propensity and housing inventory jumped discretely as one entered non-judicial states. There is no jump in other homeowner attributes such as credit scores, income, or education levels. Using state judicial requirement as an instrument for foreclosures, we show that foreclosures led to a large decline in house prices, residential investment, and consumer demand from 2007 to 2009. As foreclosures subsided from 2011 to 2013, the difference between foreclosure rates in non-judicial and judicial requirement states shrank and we find evidence of a stronger recovery in non-judicial states.

Keywords: Foreclosures, House Prices, Durable Consumption, Residential Investment, Auto Sales, Mortgage Defaults, Amplification