The Short Sale Stigma

Abstract

Despite a recent upturn, housing prices remain in flux in most cities nationwide. Lenders are still left dealing with a glut of distressed properties. They can choose to foreclose on the property or allow the owner/mortgagor to attempt to sell the property for less than the outstanding balance of the mortgage in a short sale agreement. The best way to clear the market of distressed properties is an important policy question. This is the first study to examine not only the price and time on market effect of being a short sale but also whether the short sale process itself creates a market stigma.

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Notes

  1. 1.

    The term has come to be generally accepted to mean a property on which its existing loan amount is greater than its property value.

  2. 2.

    In fact, it is common for many parties such as Home Owner Associations, local taxing authorities, and other stakeholders to become either directly or indirectly involved in the process.

  3. 3.

    http://www.fhfa.gov/Default.aspx?Page=14

  4. 4.

    http://www.realtytrac.com/trendcenter/fl-trend.html

  5. 5.

    http://www.housingwire.com/news/miami-nondistressed-properties-lead-home-value-increases

  6. 6.

    Again, please note that non-distressed here references properties being marketed that are neither foreclosures nor short sales.

  7. 7.

    Some might be uncomfortable with the exposition of the models for price and marketing span due to technically incorrect subscripts. However, this method of exposition is chosen for its compactness in explaining how price and days on market are typically modeled. A simple glance at the Exhibits for estimating selling price and days on market should resolve any questions of model specification.

  8. 8.

    With respect to Miller (1978), this finding is not uncommon. In a working paper by Benefield and Hardin, the authors point out that despite the recognized relationship between price and time on market the relationship ranges between positive and significant to negative and significant to statistically insignificant across numerous works. The author’s suspect this is in part due to measurement error.

  9. 9.

    When the dependent variable in a regression is log-transformed (such as lnSP in this example), the coefficient of an independent variable that has not been similarly transformed would be interpreted by using an exponential function. Further discussion of these issues may be referenced here: https://www.cscu.cornell.edu/news/statnews/stnews83.pdf

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Correspondence to Kimberly R. Goodwin.

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Goodwin, K.R., Johnson, K.H. The Short Sale Stigma. J Real Estate Finan Econ 55, 416–434 (2017). https://doi.org/10.1007/s11146-016-9571-2

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Keywords

  • Housing
  • Short sale
  • Foreclosure
  • Real estate valuation
  • Brokerage