Foreclosure Discount: Definition and Dynamic Patterns
Real Estate Economics, Forthcoming
Posted: 8 Jun 2014 Last revised: 10 Jun 2014
Date Written: May 30, 2014
The lack of a consistent definition of foreclosure discount and variety of methods to quantify the phenomenon gives rise to discount rates that vary from nonexistent to sizeable across different locations and time periods. We define the foreclosure discount as the discount of the realized real-estate-owned (REO) sale price relative to a normal-sale estimated market value. Our study spans 16 CBSAs for the January 2000 to December 2012 period, covering 1.34 million REO sale transactions. We report three noteworthy empirical findings. First, a high REO sale concentration in a market increases the foreclosure discount. Second, the foreclosure discount rate is negatively related to recent house-price appreciation. Third, after controlling for property condition we find that lower value properties exhibit a lower foreclosure discount than higher-value properties.
Keywords: Foreclosures, REO Discounts, REO Sales
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