Tracing the source of liquidity for distressed housing markets

Abstract

Abstract We show that profit‐seeking institutional investors provide valuable liquidity and spur the recovery of distressed housing markets. Using a quasi‐natural experiment wherein investors purchased prepackaged distressed home portfolios from government‐sponsored enterprises, we find that transaction prices of properties located within 0.25 miles of bulk‐sale properties increased by 1.4% more than homes located farther away. This positive price spillover effect helped reverse the discounts at which such properties were being sold prior to the bulk‐sale event. The price spillover effect due to the bulk‐sale event is greater for foreclosed homes (4.1%), homes similar to the bulk‐sale homes (2.5%), and homes in highly distressed neighborhoods (7.0%). Our results highlight asset disposition through pooling and institutional participation as a potential market‐driven channel for the recovery of distressed housing markets.