Advertisement

The Journal of Real Estate Finance and Economics

, Volume 46, Issue 2, pp 339–354 | Cite as

Exploring the Foreclosure Contagion Effect Using Agent-Based Modeling

  • Marshall Gangel
  • Michael J. SeilerEmail author
  • Andrew Collins
Article

Abstract

Over the last several years, the United States has experienced a significant recession. During this downturn, the number of real estate foreclosures has risen drastically. Recent studies have demonstrated a reduction in property values due to neighboring foreclosures—known as the foreclosure contagion effect. This study uses an agent-based modeling approach to explore market-wide emergent behavior that results from the interconnected property-agent behavior. Specifically, we find that the magnitude of the foreclosure contagion effect is a less powerful cause of eventual market collapse than the time a foreclosed property is allowed to linger on the market. This is important because disposition time is much easier to address from a policymaker perspective than is the strength of the foreclosure contagion effect.

Keywords

Foreclosure contagion effect Disposition time Agent-based modeling 

References

  1. Bokhari, S., & Geltner, D. (2011) “Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications,” Real Estate Economics, 39:4, forthcoming.Google Scholar
  2. Burge, W., Harrison, D., & Seiler, M. (2011) “The Paradox of Judicial Foreclosure: Collateral Value Uncertainty and Mortgage Rates,” working paper, Texas Tech.Google Scholar
  3. Einio, M., Kaustia, M., & Puttonen, V. (2008). Price setting and the reluctance to realize losses in apartment markets. Journal of Economic Psychology, 29, 19–34.CrossRefGoogle Scholar
  4. Geltner, D., MacGregor, B., & Schwann, G. (2003). Appraisal smoothing and price discovery in real estate markets. Journal of Urban Economics, 40(5/6), 1047–1064.Google Scholar
  5. Genesove, D., & Mayer, C. (2001). Loss aversion and seller behavior: evidence from the housing market. Quarterly Journal of Economics, 116, 1233–1260.CrossRefGoogle Scholar
  6. Gilbert, N. (2008) “Agent-Based Models”, in Series: Quantitative Applications in the Social Sciences, SAGE Publications.Google Scholar
  7. Guiso, L., Sapienza, P., & Zingales, L. (2009) “Moral and Social Constraints to Strategic Default on Mortgages,” working paper, University of Chicago.Google Scholar
  8. Harding, J., Rosenblatt, E., & Yao, V. (2009). The contagion effect of foreclosed properties. Journal of Urban Economics, 66(3), 164–178.CrossRefGoogle Scholar
  9. Immergluck, D., & Smith, G. (2006). The external costs of foreclosures: the impact of single-family mortgage foreclosures on property values. Housing Policy Debate, 17(1), 57–79.CrossRefGoogle Scholar
  10. Lin, Z., Rosenblatt, E., & Yao, V. (2009). Spillover effects of foreclosures on neighborhood property values. Journal of Real Estate Finance and Economics, 38(4), 387–407.CrossRefGoogle Scholar
  11. Ling, D., & Archer, W. (2009) “Real Estate Principles: A Value Approach”, McGraw-Hill Irwin.Google Scholar
  12. North, M., & Macal, C. (2007) “Managing Business Complexity: Discovering Strategic Solutions with Agent-Based Modeling and Simulation”, Oxford University Press, 2007.Google Scholar
  13. Odean, T. (1998). Are investors reluctant to realize their losses? Journal of Finance, 53(5), 1775–1798.CrossRefGoogle Scholar
  14. Pence, K. M. (2003) “Foreclosing on Opportunity: State Laws and Mortgage Credit,” Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, 2003-16.Google Scholar
  15. Pence, K. M. (2006). Foreclosing on opportunity: state laws and mortgage credit. Review of Economics and Statistics, 88(1), 177–182.Google Scholar
  16. Rogers, W., & Winter, W. (2009). The impact of foreclosures on neighboring housing sales. Journal of Real Estate Research, 31(4), 455–479.Google Scholar
  17. Schelling, T. (1969). Models of segregation. American Economic Review, 59(2), 488–493.Google Scholar
  18. Seiler, M., Seiler, V., Traub, S., & Harrison, D. (2008). Regret aversion and false reference points in residential real estate. Journal of Real Estate Research, 30(4), 461–474.Google Scholar
  19. Shefrin, H., & Statman, M. (1985). The disposition to sell winners too early and ride losers too long: theory and evidence. Journal of Finance, 40(3), 777–790.CrossRefGoogle Scholar
  20. Shumway, T., & G. Wu, (2009) “Does Disposition Drive Momentum?,” working paper, University of Michigan.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Marshall Gangel
    • 1
  • Michael J. Seiler
    • 2
    Email author
  • Andrew Collins
    • 1
  1. 1.Virginia Modeling, Analysis, and Simulation Center (VMASC)Old Dominion UniversityNorfolkUSA
  2. 2.FinanceOld Dominion UniversityNorfolkUSA

Personalised recommendations