Author:
John P. Harding, Professor of Finance and Real Estate
Eric Rosenblatt, Fannie Mae
Vincent W. Yao, Fannie Mae
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.
This paper was presented on September 16th, 2009 at the FDIC's Seidman Center for the FHFA and the FDIC cohosted symposium on “Improving Assessment of the Default Risk of Single-Family Mortgages”. The symposium included sessions on: Collateral and Appraisal Issues, Underwriting Standards, and Issues in Default Modeling. Attendance included housing and mortgage market experts from industry, academia, and government. The research paper was selected from submissions received in response to a Call for Papers issued in the spring.
The Call for Papers can be downloaded here.