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The Journal of Real Estate Finance and Economics

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02-02-2022

After the Boom: Transitory and Legacy Effects of Foreclosures

Authors: Geoffrey K. Turnbull, Arno J. van der Vlist

Published in: The Journal of Real Estate Finance and Economics | Issue 2/2023

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Abstract

Foreclosures lead to lower house prices in the short run. However, whether or not foreclosures also have long-run or legacy price effects has not been addressed extensively. Do neighborhoods with a greater number of past foreclosures exhibit long lasting house price discounts? This paper examines both transitory and legacy foreclosure price effects. We use almost 20 years of data from one of the epicenters of the foreclosure crisis: Orange County, Florida. We measure the number of recent and past foreclosures within narrowly defined neighborhoods for each house sold during 2016–2019:Q2. We compare transaction prices with different numbers of recent and past foreclosures, while controlling for differences in observed property characteristics and taking measures to reduce the impact of unobserved heterogeneity. We find that greater numbers of recent and past foreclosures are associated with lower house prices. We find strong transitory effects consistent with the existing literature. We also find significant but modest legacy effects on surrounding prices. These long-run discounts are about 0.41 percent to 0.79 percent in Orange County, Florida.

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Public tax records have several advantages (Ihlanfeldt and Mayock 2012). First, they provide information on the entire stock of existing properties, not just those that sell. Second, it includes all sales: open market sales and foreclosures.

See Fla. Stat. 45.031.

In our data for single family homes we have a total of 382,306 deeds over 2000-2019 (excluding administrative deeds or quit claims) of which 74 percent includes Warranty Deeds, 11 percent Certificate of Title, and 14 percent Special Warranty Deeds. Note that short sales are within the Warranty Deed transactions.

At the peak of the crisis, properties in Orange County, Florida remained in foreclosure for 186 days (median for 2011). We therefore also experimented with a time window of 180 days for ST. The results are similar to those reported here, using a time window of 90 days.

Homestead exemption for a given calendar year must be filed before March 1. See, https://www.ocpafl.org/exemptions/hx_file.aspx.

We convert transaction prices into real transaction prices in the repeat sales models using the BLS CPI-u index.

We have also replaced the measure of cumulative foreclosures before 2013 with the number of cumulative foreclosures up to 90 days before sale. The transitory effect and legacy effects remain unchanged.

Note that the previous sale, \(P_{i t -1}\) , is not restricted to sales after 2015.

Average homestead exemption for transacted units dropped from 62 to 45 percent in our sample from 2000 through 2019.

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Title: After the Boom: Transitory and Legacy Effects of Foreclosures
Authors: Geoffrey K. Turnbull
Arno J. van der Vlist
Publication date: 02-02-2022
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 2/2023
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-021-09882-w

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