It's All Local: Using Spatial Analysis to Estimate Local Effects of Foreclosure on Neighboring Housing Prices
Thursday, November 7, 2019
Plaza Building: Concourse Level, Plaza Exhibits (Sheraton Denver Downtown)
*Names in bold indicate Presenter
From 2006 to 2010, the number of residential foreclosures nationwide grew to levels not seen since the Great Depression. Prior literature argues that the negative externalities of foreclosures on neighboring house prices justify government intervention. Such government interventions often cover state, regional, or national geographies, but it is unlikely that foreclosures affect house prices uniformly from neighborhood to neighborhood. Existing literature typically relies on traditional hedonic price models and spatial lag models to provide an average estimate of each foreclosure on housing prices, yet the average estimates produced by such global econometric models obscure local variation and extreme effects. To overcome this blind spot, we integrate a non-parametric spatial technique—the Geographically Weighted Regression (GWR)—into our hedonic house price model to investigate how the impact of foreclosures on housing prices vary across space. We argue that foreclosure is a proxy for one or more mechanisms that lead to a downward effect on housing prices and that the impact of the mechanisms varies on a hyper-local level. Using Zillow data on housing prices and foreclosures before, during, and after the Great Recession (2006 and 2014), we model the spatially-varying impact of foreclosures on nearby home sale prices in three metropolitan counties in Ohio. We find substantial variation in the impact of foreclosures on neighboring, non-distressed housing prices, with coefficients and t-statistics ranging from -5.3 to 2.6 and from -25.24 to 4.36, respectively, indicating substantial variation in the local price response to nearby foreclosures, controlling for property- and neighborhood-level characteristics. Such variation suggests that government housing interventions may have differential effects across different neighborhoods. This paper contributes to literature on the effect of foreclosures on housing prices, housing policy, and using spatial methods to investigate public policy problems.