Two Essays on Sales of Distressed Real Estate

Abstract: As households across large parts of the world are increasingly leveraged, an understanding of the risks and consequences associated with household credit default is of great importance. This thesis consists of two essays with a focus on foreclosed residential properties. More specifically, the market of such sales and the impact on sale price caused by such a sale mechanism as compared to sales on the general market. Research on foreclosed properties is primarily based upon U.S. data; this thesis therefore adds research in an institutional setting having received little previous attention.The first essay is co-authored with Han-Suck Song and Mats Wilhelmsson. A spatial hedonic model is applied on transaction data of apartments and single-family houses sold in Stockholm, Sweden, during the period of 2006 to 2013. Discounts on price of 20.1% and 24.6% are estimated for foreclosed apartments and single-family houses, respectively. Apartments that have been sold due to a lost membership in the housing association to which the apartment belongs are sold at a 29.1% discount. The larger discount is a likely consequence of such sales being restricted in the number of attempted auctions.The second essay applies propensity score matching ontransaction data and repeat-sales data of single-family houses sold in Stockholm, Sweden, during the period of 2005 to mid-2014. A 5.2 times higher rate of turnover subsequent of a foreclosure as compared to similar properties sold on the general market indicates that professional buyers are taking advantage of a discount on price. Further support towards that foreclosed properties are sold at a discount is found by estimation of holding period returns. Foreclosed properties are found to experience a 10.7% to 7.6% lower annualized return prior to a foreclosure, during a mean holding period of 4.3 years. Subsequent of a foreclosure, buyers earn a 37.7% to 48.6% higher annualized return, during a mean holding period of 1.2 years, as compared to return sachieved by those having bought similar properties on the general market. As 15.4% of foreclosed properties have been bought by a buyer having bought more than one such property, a lack of competition provides a possible explanation for lower sale prices.