Foreclosure Externalities and Home Liquidity
41 Pages Posted: 2 Jun 2019
Date Written: May 6, 2019
We study the external impact of foreclosures, exploring how foreclosed properties affect the liquidity of nearby homes. Empirically, we find a foreclosure increases a nearby home’s time-on-market by approximately 30%, on average, which is primarily driven by a disamenity effect. There is evidence that this delay comes from surprises or information shocks to nearby sellers, as foreclosures that come on and/or leave the market after a nearby home’s listing date experience the largest adverse liquidity effects. However, when there is no surprise and a nearby foreclosure remains through the entire marketing period, sellers discount list prices more steeply, effectively counteracting these liquidity effects. More generally, the results suggest that information, pricing, and expectations play key roles in how this externality is absorbed by the real estate market.
Keywords: spatial externalities, foreclosure spillovers, residential real estate, time on market, liquidity, distressed homes, spatial hedonic models, neighborhood conditions, probability of sale
JEL Classification: R23, R10, R30
Suggested Citation: Suggested Citation