A recent set of influential papers has argued that residential mortgage foreclosures reduce the sale prices of nearby properties. This paper revisits this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. In our baseline specification, we find that properties within 1/16 of a mile of (1) a seriously delinquent property, (2) a bank-owned property, (3) a property sold by the bank in the last year and (4) a property sold by the bank more than a year ago sell at 2.8%, 3.3%, 2.4% and -0.2% discounts respectively. In other words, the measured effect of foreclosures on prices appears long before the bank forecloses and ends about a year after the banks sells. The estimates are very sensitive to the condition of the distressed property with a positive correlation existing between house price growth and foreclosed properties identified as in “above average” condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure exacerbate the negative effect of mortgage distress on house prices.