Are Foreclosure Spillover Effects Universal? Variation over Space and Time

Abstract

Government intervention in the housing market was partially driven by research showing that foreclosures lower neighboring housing values and thus increase neighbors’ risk of foreclosure. While prior research has consistently identified a negative spillover effect of foreclosures on nearby housing values, the magnitude of the effect varies widely across studies. We argue that the spillover effect on nearby housing prices varies across space and over time. To capture the extent of spatial variation, we employ geographically weighted regression, which allows modeled relationships to vary locally within a geographic area. We find heterogeneous foreclosure spillover effects both across and within metropolitan areas and that the magnitude and range of said effects vary over time. These findings raise the possibility that policies and programs designed to intervene in the housing market analyze and use local variation in the negative externalities of foreclosure to best target scarce resources within and across communities.