Time and distance heterogeneity in the neighborhood spillover effects of foreclosed properties

Abstract

In this paper, we examined heterogeneity in the simultaneous space-time impact of foreclosures on neighborhood property values. Foreclosures with longer foreclosure processes were associated with negative neighborhood price externalities from the time the foreclosing household still had ownership of the property and continued through the Real Estate Owned period. However, foreclosures with shorter foreclosure processes were associated with negative neighborhood price externalities that did not occur until at least three months after the foreclosure auction and were much smaller in magnitude. Results suggest a negative neighborhood effect of extending the length of the foreclosure process. Policy encouraging foreclosure “workout” efforts, which when unsuccessful extend the duration of the foreclosure process, should take these additional price externalities into account.

Keywords:

• Hedonic model
• foreclosures
• heterogeneity

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Sometimes, the foreclosure process terminates prior to a transfer of ownership either because the first owner becomes current on their mortgage or the lender modifies the loan. Modifications became increasingly utilized with the passage of new legislation in 2009 (e.g. Making Home Affordable Plan and the Home Affordable Modification Program) as a response to the financial crisis that began in 2007 (Stewart, 2010).

2 See Rogers & Winter (2009), and Kobie & Lee (2011) for other applications using spatial econometric specifications.

3 See Kan (2008) for a comparison of foreclosure data sources including RealtyTrac data.

4 We follow literature (such as Schuetz et al. (2008), and Leonard & Murdoch (2009) among others) to determine the distance rings. We do not include farther rings since past literature, as well our model, indicates foreclosures in farther rings, such as 500–1000 feet, 1000–1500 feet, do not have significant negative impact on nearby house sales. The results for models which include the farther rings are available from the authors upon request.

5 Observations used only correspond to non-foreclosed transactions.

6 Model 1: LR test statistic = 139.9, p value = 0; Model 2: LR test statistic = 47.1, p value = 0; Model 3: LR test statistic = 166.3, p value = 0.

7 Percentage change = e^α − 1.

8 We also examined a model with two more outer rings, 500–1000 feet and 1000–1500 feet. The main result remained: the heterogeneous effects between RW2 and UW2 foreclosures disappeared in outer rings.

9 These include all RW2 foreclosures as well as foreclosures for which a market sale was observed more than 24 months after the foreclosure auction.

10 To test for this, we applied a Durbin–Wu–Hausman test to test if the ratio of the number of UW2 foreclosures to the number of both types of foreclosures within 2000 feet of a market sale was endogenous. Lagged spatial weighted average of neighborhood sale prices (our W_tP_t terms in equation (1(1) )) were used as instruments. The test failed to reject the null hypothesis that the ratio was exogenous.

11 Results are available from the author upon request.

12 x_i and d_i are similar to the variables included in equation (1(1) ).

13 The sample size is 7468.

14 Results are available from the authors upon request.