Why Are Foreclosures Contagious?

This article investigates the mechanism by which foreclosed properties depress neighboring property prices. Using a novel dataset on housing capital expenditure, I verify as accurate the claim of disinvestment theory made in earlier studies. When capital expenditure investment, neighborhood price tr...

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Bibliographic Details
Published in:	Real estate economics Vol. 45; no. 4; pp. 979 - 997
Main Author:	Li, Lingxiao
Format:	Journal Article
Language:	English
Published:	Bloomington Blackwell Publishing Ltd 01-12-2017
Subjects:	Capital expenditures Foreclosure Housing Markets Multiple listing services Neighborhoods Prices Real estate
Online Access:	Get full text
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Summary:	This article investigates the mechanism by which foreclosed properties depress neighboring property prices. Using a novel dataset on housing capital expenditure, I verify as accurate the claim of disinvestment theory made in earlier studies. When capital expenditure investment, neighborhood price trends, number of Multiple Listing Service listings and neighborhood fixed effects are controlled for, the negative effect on property prices is significant from nearby foreclosures, real estate owned (REO) listings and REO sales, but not from default and delinquent properties. The effect is larger in a depressed market than in an appreciating market. I argue that the most plausible explanation for these results is that a foreclosure discount drives down the reference prices for nearby properties and depresses neighborhood values. This discount information is revealed to the public through foreclosures, REO listings and REO sales.
ISSN:	1080-8620 1540-6229
DOI:	10.1111/1540-6229.12162