Forced Sales and House Prices
01 Aug 2011-The American Economic Review (American Economic Association)-Vol. 101, Iss: 5, pp 2108-2131
TL;DR: The market for housing differs in several important ways from the textbook model of a liquid asset market with exogenous fundamentals as mentioned in this paper, which implies that the price at which a house is sold can be influenced not only by general supply and demand conditions, but also by idiosyncratic factors, including the urgency of the sale and the effects of ownership transfer on the physical quality of the house.
Abstract: The market for housing differs in several important ways from the textbook model of a liquid asset market with exogenous fundamentals. This implies that the price at which a house is sold can be influenced not only by general supply and demand conditions, but also by idiosyncratic factors, including the urgency of the sale and the effects of the ownership transfer on the physical quality of the house. First, houses are productive only when people are living in them. Owning an empty house is equivalent to throwing away the dividend on a financial asset. Second, houses are fragile assets that need maintenance, and are vulnerable to van dalism. Unoccupied houses are particularly vulnerable and expensive to protect. Third, short-term rental contracts involve high transactions costs, resulting from the moving costs of renters and the need of homeowners to protect their property against damage. Fourth, houses are expensive, indivisible, and heterogeneous assets. Each house has certain unique characteristics which are likely to appeal to certain poten tial buyers and not to others, so selling a house requires matching it with an appro priate buyer. Because of the high costs of intermediation in housing, this task is normally undertaken by a real estate broker rather than a dealer. Fifth, most home owners must finance their purchases using mortgages, collateralized debt contracts that transfer home ownership to the mortgage lender through a foreclosure process if the homeowner defaults. The expansion of mortgage credit in the early 2000s and the recent decline in house prices have led to an unprecedented increase in foreclosures since 2006. Foreclosures transfer houses to financial institutions which must maintain and pro tect them until they can be sold. Foreclosed houses are likely to sell at low prices, both because they may have been physically damaged during the foreclosure pro cess, and because financial institutions have an incentive to sell them quickly. In a liquid market, an asset can be sold rapidly with a minimal impact on its price, but
Figures (14)
Table 6 - Price Discount for Forced Sales 
Figure 1: Geographic Distribution of Housing Transactions by Zip Code 
Table 2 - Frequency of forced sales 
Table 11 - Neighborhood VAR with share of forced sales 
Table 5 - Hedonic regression coefficients 
Table 14 - Lagged foreclosures 
Table 7 - Number of sellers effects 
Table 12 - Cross-price effects of foreclosures 
Table 8 - Price discount and value components 
Table 4 - Descriptive statistics for forced sales 
Figure 2: Geographic Distribution of Percentage of Housing Transactions that are Forced Sales by Zip Code 
Table 13 - Interaction of spillover effect with value components 
Table 9 - Previous Forced Sales Effect 
Table 3 - Other characteristics of forced sales
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References
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