How Do Foreclosures Exacerbate Housing Downturns?

Abstract

We present a dynamic search model in which foreclosures exacerbate housing busts and delay the housing market's recovery. By raising the seller to buyer ratio and making buyers more selective, foreclosures freeze the market for non-foreclosures and reduce price and sales volume. Because negative equity is necessary for default, foreclosures can cause price-default spirals that amplify an initial shock. To quantitatively assess these channels, the model is calibrated to the recent bust. The estimated amplification is significant: foreclosures exacerbated aggregate price declines by 60 percent and non-foreclosure price declines by 24 percent. Furthermore, policies that slow foreclosures can be counterproductive.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 52 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.