Download or read book The Foreclosure-house Price Nexus written by Charles W. Calomiris and published by . This book was released on 2008 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite housing's importance to the economy and worries about recent financial and economic turmoil traceable to housing market difficulties, little has been written on how distress in the housing market, measured by foreclosures, affects home prices, or how these variables interact with other macroeconomic or housing variables such as employment, housing permits or sales. Employing a panel VAR model to examine quarterly state-level data, our paper is the first to systematically analyze these interactions. There is substantial regional variation across states, which facilitates our ability to identify linkages among variables. Importantly, price-foreclosure linkages work in both directions; foreclosures have a significant, negative effect on home prices, while an increase in prices alleviates distress by lowering foreclosures. Similarly, employment and foreclosures have mutually negative effects on each other. The impact of foreclosures on prices, while negative and significant, is quite small in magnitude. We demonstrate this by simulating house price changes in response to extreme foreclosure shocks. Even under extremely pessimistic scenarios for foreclosure shocks, average U.S. house prices, as measured by the comprehensive OFHEO house price index (which we argue is the most reliable and useful measure of house prices to use for our purposes), likely would decline only slightly or remain essentially flat in response to foreclosures like those predicted for the 2008-2009 period. This suggests that home prices are quite sticky, and that fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.