Foreclosure reduces the eventual sale price of a home by an average 27 percent, compared to the prices paid for similar properties nearby. Those nearby homes, in turn, could see their own prices depressed by 1 percent, if they happen to be within 250 feet of the foreclosed property.
Those are the findings of economists at Harvard University and the Massachusetts Institute of Technology who scoured records pertaining to 1.83 million Massachusetts home sales from 1987 to 2009. Their research, forthcoming in the journal American Economic Review, is the most rigorous and comprehensive analysis to date of the losses sustained on foreclosed properties.
"The losses on foreclosed homes proved to be much larger than we had expected," says lead author John Y. Campbell, the Morton L. and Carole S. Olshan Professor of Economics at Harvard. "If anything, these results may underestimate losses on foreclosed properties nationwide, since Massachusetts has not experienced a housing boom and bust as pronounced as that seen in many other parts of the country in recent years."
Campbell and his co-authors, Harvard's Stefano Giglio and MIT's Parag Pathak, found that other types of forced sales also reduce home prices, but by smaller amounts. When a house is sold after the death of an owner, they found, the price sinks 5 to 7 percent on average. When an owner declares bankruptcy, the value falls by an average 3 percent.
The researchers write that death-related discounts may result from poor home maintenance by older sellers, while foreclosure discounts appear rooted in the greater likelihood of deterioration among foreclosed homes, and specifically the threat of vandalism. They note that the percentage loss on foreclosed properties is greater, on average, in less safe neighborhoods, where risks of damage to vacant homes may be higher.
"Banks know it's bad to hold an asset that's susceptible to damage, and want to unload such assets quickly," Campbell says. "Also, the costs to maintain a house are fixed, but those fixed costs eat up more of the price of a cheap house -- making lenders even more eager to dispose of foreclosed cheaper homes."
Campbell and his colleagues found that prices of other homes fall by about 1 percent if within roughly 250 feet of a foreclosed property, an effect that fades away for homes 500 or more feet from a foreclosure. What's more, these "contagion" effects appear to be cumulative, meaning that multiple foreclosed homes in close proximity can depress the value of other nearby properties by several percentage points.
The researchers say their results indicate that public policy should aim to minimize foreclosures, which appear broadly harmful.
"Our work provides evidence of genuine social harm arising from foreclosures," Campbell says. "Public policy should discourage reliance on foreclosure as a means of protecting lenders. While foreclosure may rescue lenders, it damages the rest of society."
Campbell, Giglio, and Pathak's work was supported by Harvard's Real Estate Academic Initiative.
Steve Bradt | EurekAlert!
Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)
Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO
University of Maryland researchers contribute to historic detection of gravitational waves and light created by event
On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...
Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.
Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....
Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).
When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...
Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.
How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...
Scientists from the Max Planck Institute of Quantum Optics, using high precision laser spectroscopy of atomic hydrogen, confirm the surprisingly small value of the proton radius determined from muonic hydrogen.
It was one of the breakthroughs of the year 2010: Laser spectroscopy of muonic hydrogen resulted in a value for the proton charge radius that was significantly...
17.10.2017 | Event News
10.10.2017 | Event News
10.10.2017 | Event News
20.10.2017 | Information Technology
20.10.2017 | Materials Sciences
20.10.2017 | Interdisciplinary Research