Effect of Foreclosure Status on Residential Selling Price: Comment

Abstract

In this comment we examine the conclusion by Forgey, Rutherford and VanBuskirk (1994) “that the foreclosed properties sold at a 23% discount,” using a sample of nearly 2,000 residential property sales from the Las Vagas, Nevada area. We found that when not controlling for location with a set of dummy variables for zip codes, HUD foreclosed properties sold for between 12.18% and 13.96% below a random sample of properties not within one block of foreclosed properties. When controlling for location, using a set of thirty-one dummy variables for zip codes, the foreclosure discount fell to between 8.45% and 9.72%. When controlling for the common characteristics between foreclosed properties and their neighbors, we found foreclosure discounts are very small (between .17% and 2.58%) and no longer statistically significant. We conclude that foreclosure does not provide an opportunity for arbitrage profits, and this study does reinforce the findings of other studies that conclude real estate markets operate efficiently.