The Price of Protection: Foreclosure Law and House Prices
Dec. 2003
Abstract
We develop a dynamic general equilibrium model in which defaulter-friendly foreclosure laws increase downpayment requirements; this effect lowers the aggregate demand for housing and thus decreases equilibrium house prices. We test this hypothesis by comparing house prices in nearby census tracts along state borders. Houses that are geographically close to each other (but lie in different states) are subject to different foreclosure laws but share unobserved factors that affect house prices. We estimate a semiparametric model in which the nonparametric component captures all factors that vary smoothly over space. The effect of foreclosure laws is identified because the laws change discontinuously at state borders. As predicted by our model, defaulter-friendly foreclosure laws are associated with house price declines between 2 and 4 percent.
Journal of Economic Literature classification numbers:
G21, K11, D18, D82
Keywords:
Foreclosure law, house prices, default, delinquency
Full Text:
The opinions I express here and elsewhere are mine alone and do not necessarily reflect those of my employer.
Last Modified: Sat Dec 20 19:54:02 2003 GMT
Created By: Andreas W. Lehnert <Andreas@marginalq.com>