Spillover Effects of Foreclosures on Neighborhood Property Values

Abstract

Previous studies have shown that foreclosure often results in vandalism, disinvestment and other negative spillover effects in the neighborhood. This paper extends these views into a formal theoretical model through pricing based on comparables. We project that the spillover effect of a foreclosure on neighborhood property values depends on two factors: the discount of foreclosure sale and the weight placed on the foreclosed property as a comparable in the valuation. The former is related to housing cycle and the latter varies by time of foreclosure and its distance from the subject property. Empirical results based on a 2006 sample show that this effect is significant within a radius of 0.9 km (roughly 10 blocks) and within 5 years from its liquidation. The most severe impact is an 8.7% discount on neighborhood property values, which gradually drops to anywhere between −1.2 to −1.7% for foreclosures liquidated within the past 5 years. These spillover effects vary slightly when the sample selection bias is taken into account. Based on an alternative sample of purchase transactions in 2003, the estimated spillover effects in booming years are reduced by half, confirming on the important role played by housing cycles. Copyright Springer Science+Business Media, LLC 2009Foreclosure, Spillover, Valuation,

Do foreclosures cause crime?

“…Most notably, a growing number of papers study the impact of foreclosures on neighboring home values (Immergluck and Smith, 2006a;Schuetz, Been, and Ellen, 2008;Harding, Rosenblatt, and Yao, 2009;Haughwout, Mayer, and Tracy, 2009;Lin, Rosenblatt, and Yao, 2009;Rogers and Winter, 2009;Hartley, 2010;Wassmer, 2010;Campbell, Giglio and Pathak;Gerardi, Rosenblatt, Willen, and Yao, 2012). The papers vary in their methods but several use statistical techniques to demonstrate that foreclosures actually lead to reductions in with such reductions.…”

Spatial Analysis of Clustering of Foreclosures in the Poorest-Quality Housing Urban Areas: Evidence from Catalan Cities

“…Several case studies have highlighted the existence of "neighborhood effects", or the direct contribution that foreclosures have made to urban deprivation and forced displacements [20,21]. Within this context, it is possible to observe links between the spatial concentration of foreclosures and falling property values at the neighborhood level [22][23][24][25][26]. Relationships have also been observed with increases in crime rates [27][28][29][30][31] and racial segregation [32,33].…”

Is there a Link Between Foreclosure and Health?

“…Whatever the root causes, delinquencies and foreclosures soared starting in late 2006 (Campbell, Giglio, and Pathak, 2009; Calomiris, Longhofer, and Miles, 2008, Harding, Rosenblatt, and Yao, 2009, Lin, Rosenblatt, and Yao, 2009Immergluck and Smith, 2006). 2 The turmoil in the housing market spread to capital markets and helped to generate the current continuing economic malaise (e.g., Green, 1997;Leamer, 2007;Gauger and Snyder, 2003).…”