Price Premium and Foreclosure Risk

47 Pages Posted: 18 Oct 2005 Last revised: 30 Sep 2010

See all articles by Seow Eng Ong

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate

Poh Har Neo

National University of Singapore (NUS)

Andrew C. Spieler

Hofstra University - Department of Finance

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Abstract

Many previous studies identify loan, property, borrower and environmental factors that impact the probability of foreclosure. Implicit in these studies is the assumption that the property was purchased at fair value. We question this assumption based on several empirical findings regarding property value uncertainty. In contrast to previous research, we explicitly quantify the price premium from a hedonic pricing model. Using a comprehensive database of real estate transactions from Singapore between 1989-2000, we document a price premium associated with properties that are subsequently foreclosed based on actual sales transactions. In addition, we find that the premium paid at purchase significantly increases the probability of foreclosure. These results are robust and continue to hold after controlling for other property-specific factors, time-varying macroeconomic conditions, alternative model specifications and definitions of price premium.

Keywords: Foreclosure, premium, negative equity, pricing, fair value, risk

JEL Classification: G21, G33, R51

Suggested Citation

Ong, Seow Eng and Neo, Poh Har and Spieler, Andrew, Price Premium and Foreclosure Risk. Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=819724

Seow Eng Ong (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
01-65-6516-3552 (Phone)
01-65-6774-8684 (Fax)

Poh Har Neo

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Andrew Spieler

Hofstra University - Department of Finance ( email )

Hempstead, NY 11550
United States

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