Spillover Effects of Foreclosures on Neighborhood
Property Values
Zhenguo Lin
&
Eric Rosenblatt
&
Vincent W. Yao
Published online: 27 November 2007
#
Springer Science + Business Media, LLC 2007
Abstract 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.
J Real Estate Finan Econ (2009) 38:387–407
DOI 10.1007/s11146-007-9093-z
We wish to thank editor C.F. Sirmans, an anonymous referee at the Journal of Real Estate Finance and
Economics, and Paul Obrecht at Fannie Mae for their insightful comments and suggestions. All errors
remain our own. The views expressed in this article are our own and do not necessarily represent the views
of Fannie Mae. This article won a best research paper from the American Real Estate Society Foundation
in 2007.
Z. Lin (*)
:
E. Rosenblatt
:
V. W. Ya o
Fannie Mae, 3900 Wisconsin Avenue, Washington, DC 20016, USA
e-mail: len_lin@fanniemae.com
E. Rosenblatt
e-mail: eric_rosenblatt@fanniemae.com
V. W. Ya o
e-mail: vincent_w_yao@fanniemae.com
@Phil_Robichaud
@deepthiw
@JoseServera