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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,

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices. JEL classification: G21, K11, R31 Terms of use: Documents in

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