Effect of Foreclosure Status on Residential Selling Price: Comment

Abstract

In this comment we examine the conclusion by Forgey, Rutherford and VanBuskirk (1994) ''that the foreclosed properties sold at a 23% discount,'' using a sample of nearly 2,000 residential property sales from the Las Vagas, Nevada area. We found that when not controlling for location with a set of dummy variables for zip codes, HUD foreclosed properties sold for between 12.18% and 13.96% below a random sample of properties not within one block of foreclosed properties. When controlling for location, using a set of thirty-one dummy variables for zip codes, the foreclosure discount fell to between 8.45% and 9.72%. When controlling for the common characteristics between foreclosed properties and their neighbors, we found foreclosure discounts are very small (between .17% and 2.58%) and no longer statistically significant. We conclude that foreclosure does not provide an opportunity for arbitrage profits, and this study does reinforce the findings of other studies that conclude real estate markets operate efficiently.

Estimating the Foreclosure Discount in Financially Distressed Hotels

“…Their results show an average foreclosure discount of 23%, consistent with the previous findings in Shilling et al (1990). Carroll et al (1997) questioned Forgey et al's (1994) findings, arguing that the discount rate observed in the latter study was due to a failure to adequately control for the location and neighborhood characteristics of the foreclosed properties. The authors replicated Forgey et al's (1994) study by using similar models to control for the effects of location and neighborhood condition in a sample of 1,974 single-family property sales between 1990 and 1993 in Las Vegas, Nevada.…”

“…After controlling for the property condition, their results revealed discounts of 5.6% for short sale, 10.3% for properties under foreclosure, and 13.5% for REO properties, all relative to a no-default normal market sale (Clauretie & Daneshvary, 2011). The magnitude of the foreclosure effect is similar to prior findings by Carroll et al (1997), with the magnitude of the foreclosure discount ranging between 8.5% and 9.7%. Richardson (2012) investigated the divestiture of distressed commercial real estate in a sample of 18,751 office building transactions spanning the period from 2006 to 2010.…”

“…Second, some studies provide mixed results on the magnitude of the foreclosure discount. Although some studies provide evidence of a foreclosure discount ranging between 22% and 24% (Forgey et al, 1994;Hardin & Wolverton, 1996;Shilling et al, 1990), other studies document a negligible and statistically insignificant price discount (Carroll et al, 1997). Third, most of the previous studies focus on the residential sector with limited research in the commercial sector.…”

Foreclosure loss severity and distressed home mortgage refinance

“…Among the suitable empirical SD studies for FC estimation are Shilling et al (1990), Forgey et al (1994), Hardin and Wolverton (1996), Carroll et al (1997), and Campbell et al (2011). The first four of these studies generate estimates for s based on small data samples from different geographical locations over somewhat different time intervals.…”

The Influences of Foreclosure Factors on the Value, Yield, Duration and Convexity of a Mortgage

“…Several researchers have found that mortgage defaults and the resulting property foreclosures generate a discount of the auction price of the foreclosed property of 7% to 26%, depending on its location within the United States ( e.g ., Shilling, Benjamin and Sirmans 1990, Forgey et al . 1994, Hardin and Wolverton 1996, Springer 1996, Carroll, Clauretieand and Neill 1997, Pennington‐Cross 2006, Clauretie and Daneshvary 2009, Zhou et al . 2015).…”