The Impact of Foreclosure on Housing Prices

The aim of the study is to explain if the foreclosure effect on prices is explained by a lower quality of foreclosed houses, which is a crucial aspect in the intelligibility of foreclosures. Based on a novel and comprehensive dataset, we estimate the impact of foreclosure on home prices in Florida and Indiana from 2000 to 2008. We employ a model of housing demand, which enables us to flexibly estimate (unobserved) quality as a house-specific fixed effect. We find that house-specific quality explains the vast majority of the foreclosure effects on house prices. Our results also show that foreclosed homes in Florida and Indiana lost a considerable amount of value. For example, foreclosed homes in Fort Lauderdale (Florida) lost, on average, $42; 110 (12 percent) of the average house price in Florida), while foreclosed houses in Lafayette (Indiana) lost $23; 798, which corresponds to 16:1 percent of the average house price in Indiana. The estimation results show a significant degree of heterogeneity. In much of Florida, foreclosed houses lost most value at the upper part of the house size and income distributions. In contrast, foreclosed houses in Indiana lost most value at the lower part of those distributions. Finally, we show that non-foreclosed houses agonized losses (from 0:8 percent to 4:7 percent) due to other houses in the neighborhood being foreclosed.