The neighborhood effects of foreclosure

Neighborhood quality is an important attribute of housing yet its value is rarely known to researchers. We argue that changes in nearby foreclosures reveal changes in neighborhood quality. Thus estimates of the hedonic price of nearby foreclosures provide a glimpse of values that people hold for local neighborhood quality. The empirical models include controls for both spatial dependence in housing prices and in the errors. The estimates indicate that nearby foreclosures produce externalities that are capitalized into home prices-an additional foreclosure within 250 feet of a sale negatively impacts selling price by approximately $1,666, ceteris paribus. 1 We wish to thank Nathan Berg, Magnus Lofstrom and two anonymous reviewers for helpful comments.