The Role of Foreclosures in Determining Housing Capital Expenditures

• Published in: The journal of real estate finance and economics Vol. 53; no. 3; pp. 325 - 345
• Main Author: Li, Lingxiao
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-10-2016; Springer Nature B.V
• Subjects: Bankruptcy; Capital expenditure; Capital expenditures; Corporate debt; Default; Economic models; Economic statistics; Economic theory; Economics; Economics and Finance; Externalities; Externality; Financial Services; Foreclosure; Homeowners; Houses; Housing; Housing prices; Inventory; Investment; Investments; Literature reviews; Motivation; Neighborhoods; Real estate; Regional/Spatial Science; Sales; Studies; Trends; Foreclosure; Capital expenditure; Housing; Investment externality
• ISSN: 0895-5638; 1573-045X
• DOI: 10.1007/s11146-015-9505-4

This paper uses a novel dataset of capital expenditures on housing, to study how foreclosures affect capital expenditure investments in residential properties. Empirical analysis discovers that foreclosures negatively affect capital expenditure investment through the following channels: (1) individual homeowners reduce their capital expenditures when home prices fall and the likelihood of foreclosure increases; (2) lenders pursue a strategy of low investment in real estate owned (REO) inventories; (3) the reductions in capital expenditures generate a negative externality by creating a disincentive for other homeowners to spend on home improvements; and (4) a cluster of foreclosures further worsens the reduced investment situation. Purchasers of REO properties spend more on capital expenditures than those of non-REO properties in 1 year after sales.