Foreclosure, quality and spillover in residential markets
International Journal of Housing Markets and Analysis
ISSN: 1753-8270
Article publication date: 2 March 2012
Abstract
Purpose
Prior research indicates a discount for foreclosures sold through the multiple listing service (MLS). The purpose of this paper is to examine whether the effect of foreclosure on house value is consistent over submarkets based on property size in the US single family home market. The paper also tests whether the spillover effect of a nearby foreclosure on the specific property value varies across submarkets.
Design/methodology/approach
The full sample is split into four quartiles based on the square feet of all observations. The hedonic pricing models are estimated across full sample and three subsamples, in order to examine the effect of foreclosure on selling price. The number of neighborhood foreclosures within each combination of radii and timing intervals is used to investigate the spillover effect of a nearby foreclosure on the specific property value.
Findings
It is found that the quartile with smaller houses have the largest discount associated with a foreclosure of approximately 24 percent, while the medium and larger houses have a discount of approximately 19 percent. The results are robust after including a proxy for property quality. Second, the spillover effects of nearby foreclosures are lowest for small properties and highest for large properties. Adding additional controls for housing quality reduces the observed spillover effect.
Research limitations/implications
The findings on foreclosure discount are consistent with Pennington‐Cross's argument, that the foreclosures in the smaller properties have lower appreciation than the larger ones. The paper's results about spillover effects also support the previous research, implying a greater stigma for foreclosed houses in neighborhoods with larger, more expensive houses.
Originality/value
The paper provides potential explanation for foreclosure discount and spillover effects of nearby foreclosure in the US single family residential markets.
Keywords
Citation
Rutherford, R.C. and Chen, J. (2012), "Foreclosure, quality and spillover in residential markets", International Journal of Housing Markets and Analysis, Vol. 5 No. 1, pp. 53-70. https://doi.org/10.1108/17538271211206662
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited