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Forced Sales and House Prices

What Impact do Foreclosures Have on the Pricing of Homes?

Neighborhoods, August 2011

John Y. Campbell, Stefano Giglio, and Parag Pathak use 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 27% 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%.