Fire Sales and House Prices: Evidence from Estate Sales Due to Sudden Death

34 Pages Posted: 15 Aug 2013

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Date Written: July 1, 2013

Abstract

We exploit a natural experiment in Denmark to investigate when forced sales lead to fire sale discounts. Forced sales result from sudden deaths of house owners in an institutional environment in which beneficiaries are forced to settle the estate, and hence sell the house, within 12 months. We identify 6,329 forced sales by suddenly deceased house owners, and find that forced sales bring in lower prices than do comparable houses as the deadline winds down: We find no discounts for sales long before the deadline, and discounts of 12.5% for sales shortly before the deadline. Market conditions and the urgency of the sale also affect the average discount: Discounts are larger when house prices contract, in thin markets where demand is lower, and when the sale is more likely to be a fire sale because of financial or liquidity constraints. Late fire sales are more likely when the house price is in the loss domain suggesting that disposition effects play a role in explaining discounts. We establish these results using (i) a hedonic pricing model, and (ii) the tax authorities’ yearly assessments of value as benchmark for realized prices. Overall, our results characterize market conditions under which forced sales lead to fire sale discounts.

Keywords: Household finance, Fire sales, Financial constraints, Real estate, Sudden death

JEL Classification: D14, R31

Suggested Citation

Andersen, Steffen and Nielsen, Kasper Meisner, Fire Sales and House Prices: Evidence from Estate Sales Due to Sudden Death (July 1, 2013). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2310410 or http://dx.doi.org/10.2139/ssrn.2310410

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Kasper Meisner Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

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