The effect of foreclosures on house prices

Most of the economies in the world are facing a serious challenge in the history. Real estate market's meltdown in the US is partly blamed for the current economic crisis. Housing crisis starts with declining housing prices in the US. Although, the housing prices starts declining from the early 2006, the problem exasperated in the second quarter of 2008 when housing prices dropped substantially. House prices fall is continuous and the housing market has not experienced any stability yet. Substantial drop in housing prices has caused significant increase in foreclosures around the country. There are several factors contributing to the collapse of housing price including size, age, noise, different features of the property. There is a widespread concern about the impact of the foreclosed house on housing price in the neighborhood. There is also a general consensus among common people that foreclosed housed are cheaper to comparable properties. In this context, this study investigates if there exists relationship between housing price and foreclosures. Are foreclosed properties underpriced to comparable properties?

The purpose of this study is to examine the influence of foreclosures on housing prices of the area near the Dallas Forth Worth International Airport. This study focuses on measuring the effects of foreclosures on house prices. Are foreclosed properties are undervalued? This paper investigates this question within a dynamic model that addresses the other factors influencing house prices. There are enough evidences that there are market wide systematic effects on housing prices. In this context, this study explores the other factors other than market conditions and the local economy in this model. This study develops a dynamic model of house market at a local level to estimate the influence of foreclosures on house price. House price is a function of several other factors. Therefore, this study concentrates to same local area which share common characteristics. Modeling housing market at the local area with common characteristics is expected to be helpful in identifying the relation between foreclosures and house price. In other words, the study on the factor affecting house prices at a local level will improve empirical finding which helps to gauge the effect of foreclosures on house price.

This study is organized as follows. Section II reviews the existing literature on the relationships among foreclosures, home prices, and other housing variables. Section III provides the detail information about the sample source and selection process, variables used in this study, estimation techniques employed. Section IV presents the estimation results of the study. This section also includes results of several robustness tests. Finally, Section V concludes the finding of the study.