This paper uses data on house transactions in the state of Massachusetts over the last 20 years to show that houses sold after foreclosure, or close in time to the death or bankruptcy of at least one seller, are sold at lower prices than other houses. Foreclosure discounts are particularly large on average at 28% of the value of a house. The pattern of death-related discounts suggests that they may result from poor home maintenance by older sellers, while foreclosure discounts appear to be related to the threat of vandalism in low-priced neighborhoods. After aggregating to the zipcode level and controlling for regional price trends, the prices of forced sales are mean-reverting, while the prices of unforced sales are close to a random walk. At the zipcode level, this suggests that unforced sales take place at approximately efficient prices, while forced-sales prices reflect time-varying illiquidity in neighborhood housing markets. At a more local level, however, we find that foreclosures that take place within a quarter of a mile, and particularly within a tenth of a mile, of a house lower the price at which it is sold. Our preferred estimate of this effect is that a foreclosure at a distance of 0.05 miles lowers the price of a house by about 1%.

Forced Sales and House Prices

The market for housing differs in several important ways from the textbook model of a liquid asset market with exogenous fundamentals. This implies that the price at which a house is sold can be influenced not only by general supply and demand conditions, but also by idiosyncratic factors, including the urgency of the sale and the effects of the ownership transfer on the physical quality of the house. First, houses are productive only when people are living in them. Owning an empty house is equivalent to throwing away the dividend on a financial asset. Second, houses are fragile assets that need maintenance, and are vulnerable to van dalism. Unoccupied houses are particularly vulnerable and expensive to protect. Third, short-term rental contracts involve high transactions costs, resulting from the moving costs of renters and the need of homeowners to protect their property against damage. Fourth, houses are expensive, indivisible, and heterogeneous assets. Each house has certain unique characteristics which are likely to appeal to certain poten tial buyers and not to others, so selling a house requires matching it with an appro priate buyer. Because of the high costs of intermediation in housing, this task is normally undertaken by a real estate broker rather than a dealer. Fifth, most home owners must finance their purchases using mortgages, collateralized debt contracts that transfer home ownership to the mortgage lender through a foreclosure process if the homeowner defaults. The expansion of mortgage credit in the early 2000s and the recent decline in house prices have led to an unprecedented increase in foreclosures since 2006. Foreclosures transfer houses to financial institutions which must maintain and pro tect them until they can be sold. Foreclosed houses are likely to sell at low prices, both because they may have been physically damaged during the foreclosure pro cess, and because financial institutions have an incentive to sell them quickly. In a liquid market, an asset can be sold rapidly with a minimal impact on its price, but

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To measure the impact of foreclosures on nearby property values, we use a database that combines data on 1997 and 1998 foreclosures with data on neighborhood characteristics and more than 9,600 single-family property transactions in Chicago in 1999. After controlling for some 40 characteristics of properties and their respective neighborhoods, we find that foreclosures of conventional single-family (one- to four-unit) loans have a significant impact on nearby property values. Our most conservative estimates indicate that each conventional foreclosure within an eighth of a mile of a single-family home results in a decline of 0.9 percent in value. Cumulatively, this means that, for the entire city of Chicago, the 3,750 foreclosures that occurred in 1997 and 1998 are estimated to have reduced nearby property values by more than $598 million, for an average of $159,000 per foreclosure. This does not include effects on the value of condominiums, multifamily rental properties, and commercial buildings.

The external costs of foreclosure: The impact of single‐family mortgage foreclosures on property values

The paper develops a sympathetic geographical critique of the concept of financialization which seeks to account for the growing influence of financial markets over the unfolding of economy, polity and society. Processes of financialization are claimed to be manifest at a number of scales, from higher levels of instability within the economy as a whole, through pressure exerted on corporations by capital markets, to the equity effects of the financial system on individuals and households. In seeking to explain change within contemporary society, financialization has circulated less widely than similar and related concepts such as neoliberalization. While financialization has the potential to unite researchers across cognate social science fields, thereby building critical mass and recognition within social studies of money and finance, we argue that research has been insufficiently attentive to space and place, both in terms of processes and effects. Financialization is a profoundly spatial phenomenon, representing as it does the search for a spatial-temporal fix, or quasi-resolution of the crisis tendencies of contemporary capitalism. The paper explores a number of possibly fruitful directions for work on financialization, focusing in particular on the idea of financial ecologies.

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Financializing space, spacing financialization:

Although previous research shows that prices of homes in neighborhoods with foreclosures are lower than those in neighborhoods without foreclosures, it remains unclear whether the lower prices are the result of a general decline in neighborhood values or whether foreclosures reduce the prices of nearby non-distressed sales through a contagion effect. We provide robust evidence of a contagion discount by simultaneously estimating the local price trend and the incremental price impact of nearby foreclosures. At its peak, the discount is roughly one percent per nearby foreclosed property. The discount diminishes rapidly as the distance to the distressed property increases. The contagion discount grows from the onset of distress through the foreclosure sale and then stabilizes. This pattern is consistent with the contagion effect being the visual externality associated with deferred maintenance and neglect.

The Contagion Effect of Foreclosed Properties

Foreclosures of single-family mortgages have increased dramatically in many parts of the US in recent years. Much of this has been tied to the rise of higher-risk subprime mortgage lending. Debates concerning mortgage regulation, as well as around other residential finance policies and practices, hinge critically on the social as well as personal costs of loan default and foreclosure. This paper examines the impact of foreclosures of single-family mortgages on levels of violent and property crime at the neighborhood level. Using data on foreclosures, neighborhood characteristics, and crime, the study found that higher foreclosure levels do contribute to higher levels of violent crime. The results for property crime are not statistically significant. A standard deviation increase in the foreclosure rate (about 2.8 foreclosures for every 100 owner-occupied properties in one year) corresponds to an increase in neighborhood violent crime of approximately 6.7 per cent. The policy implications of these findings...

The Impact of Single-family Mortgage Foreclosures on Neighborhood Crime

Since the early 1990s, there has been a very large growth in mortgages made by so-called subprime lenders, which specialize in lending to borrowers with credit history problems. One reason for conc...

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Measuring the Effect of Subprime Lending on Neighborhood Foreclosures: Evidence from Chicago

:In recent years, there has been continued interest in prospects for the development and sustainability of both mixed-income and racially diverse communities. We examine an important contributor to racial and economic diversity and segregation—the geographic patterns of homebuyers. In particular, we examine the extent to which neighborhoods within the Chicago metropolitan area have obtained significant levels of income and racial diversity in home buying and maintained such diversity over the 1990s. We analyze the racial and income composition of homebuyers by census tract for two periods: 1993 to 1994 and 1999 to 2000. First, by comparing changes in home buying to 1990 to 2000 changes in cross-sectional census data, we find that changes in home-buying patterns are significant contributors to neighborhood racial change. We then find a significant decline in the proportion of whites buying into neighborhoods where nearly all buyers are white. The policy implications of our findings are described an...

Geoff Smith

Papers

The external costs of foreclosure: The impact of single‐family mortgage foreclosures on property values

The Impact of Single-family Mortgage Foreclosures on Neighborhood Crime

Measuring the Effect of Subprime Lending on Neighborhood Foreclosures: Evidence from Chicago

Measuring Neighborhood Diversity and Stability in Home‐Buying: Examining Patterns by Race and Income in a Robust Housing Market

The impact of single-family mortgage foreclosures on neighborhood crime