A Low-Cost Methodology for Correcting the Distressed Sales Bias in a Downward Spiraling Housing Market

Abstract

We examine the impact of distressed sales on single-family house prices during a housing market collapse. The innovation here is a methodology to create a proxy for distressed sales when such sales are not identified in the data but are commonplace in the market. We apply our methodology to publicly available data from Las Vegas, Nevada. We find that, during the market collapse in that city, the price impact from REO transactions was greater than other distressed sales, but the difference narrowed over time. Moreover, not identifying distressed sales lowers the measured price impact of REO sales.