How Do Foreclosures Exacerbate Housing Downturns?

Abstract

We present a dynamic search model in which foreclosures exacerbate housing busts and delay the housing market's recovery. By raising the seller to buyer ratio and making buyers more selective, foreclosures freeze the market for nonforeclosures and reduce price and sales volume. Because negative equity is necessary for default, foreclosures can cause price-default spirals that amplify an initial shock. To quantitatively assess these channels, the model is calibrated to the recent bust. The estimated ampli…cation is signi…cant: foreclosures exacerbated aggregate price declines by 60 percent and non-foreclosure price declines by 24 percent. Furthermore, policies that slow foreclosures can be counterproductive.

Foreclosure Contagion and the Neighborhood Spillover Effects of Mortgage Defaults

“…But distinct from those papers, I additionally investigate alternative channels. My work is also closely linked to papers examining borrower default spillover effects from foreclosure, such as Towe and Lawley (), Guren and McQuade (), Munroe and Wilse‐Samson (), Agarwal, Ambose, and Yildirim (), and Goodstein et al. ().…”

Finance and Business Cycles: The Credit-Driven Household Demand Channel

“…Further, a foreclosure leads to difficulty in refinancing mortgages into lower rates for those living close to the foreclosed property, as banks tend to use the depressed foreclosure price as a comparison. Guren and McQuade (2015) construct a quantitative model of the housing market to assess the impact of foreclosures on house prices. They find that foreclosures during the Great Recession in the United States exacerbated aggregate price declines by 62% and non-foreclosure price declines by 28%.…”

Mortgage Design in an Equilibrium Model of the Housing Market

“…In the mid-2000s boom and subsequent bust, housing wealth extraction through the mortgage market boosted consumption in the boom and reduced consumption in the bust (e.g., Mian and Sufi, 2011;Mian, Rao, and Sufi, 2013). Mortgage debt also led to the wave of foreclosures that resulted in over six million households losing their homes, badly damaging household balance sheets and crippling the housing market (e.g., Guren and McQuade, 2019;Mian, Sufi, and Trebbi, 2015). Finally, in the wake of the recession, there has been increased attention paid to the role that mortgages play in the transmission of monetary policy to the real economy through household balance sheets (e.g., Auclert, 2019;Wong, 2019;Di Maggio et al, 2017;Beraja et al, 2019).…”