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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%.