The Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoil
National Bureau of Economic Research Working Paper 14294, September 2008
Charles W. Calomiris, Stanley D. Longhofer, and William Miles

Although the recent housing market downturn is unprecedented on a national level, the current situation in most states is well within the bounds of past regional downturns.  This research paper uses this fact to analyze how a sharp increase in foreclosures is likely to affect home prices.  The authors find that while a rise in foreclosures does lower home prices, this effect is relatively small in magnitude.  Simulations based on the results in this paper suggest that U.S. house prices (as measured by the OFHEO all-transactions home price index) will fall only modestly in response to even a severe rise in foreclosures.  While home prices may still fall in near future, this will not be due to the recent rise in foreclosures.