Foreclosure Externalities: Some New Evidence

47 Pages Posted: 8 Sep 2012 Last revised: 4 Jul 2014

See all articles by Kristopher Gerardi

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

Suggested Citation

Gerardi, Kristopher S. and Rosenblatt, Eric and Willen, Paul S. and Yao, Vincent, Foreclosure Externalities: Some New Evidence (September 2012). NBER Working Paper No. w18353. Available at SSRN: https://ssrn.com/abstract=2143540

Kristopher S. Gerardi (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Eric Rosenblatt

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

16517 Keats Terrace
Derwood, MD 20855
United States

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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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