Estimating the Effect of Mortgage Foreclosures on Nearby Property Values: A Critical Review of the Literature
W. Scott Frame
Economic Review, Vol. 95, No. 3, 2010
In response to the wave of residential mortgage foreclosures in the past few years, federal, state and local government intervention programs have aimed to reduce the presumed social costs of foreclosures. Before the recent crisis, there was little economic research documenting foreclosure spillover effects.
This article takes a critical look at the recent literature that seeks to estimate the negative effects of residential mortgage foreclosures. This review suggests that foreclosed properties sell at a discount, likely because such properties are in worse condition than surrounding properties. What's more, very nearby foreclosures appear to depress the sales prices of nondistressed properties, but this effect diminishes rapidly over physical distance and time.
The author suggests that the considerable variation in foreclosure discount and spillover estimates that occurs from study to study may be related to data limitations (specific places and times) and poorly specified empirical models in some studies. He notes that studies using a repeat-sales approach seem to hold greater promise than those using hedonic regressions; the former approach is more likely to hold property and neighborhood characteristics constant and make it easier to examine multiple geographies and longer time periods.