Premium
Price Premium and Foreclosure Risk
Author(s) -
Ong Seow Eng,
Neo Poh Har,
Spieler Andrew C.
Publication year - 2006
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2006.00165.x
Subject(s) - foreclosure , real estate , economics , risk premium , value (mathematics) , property value , econometrics , loan , price premium , house price , property (philosophy) , financial economics , hedonic pricing , contrast (vision) , microeconomics , actuarial science , willingness to pay , finance , computer science , philosophy , epistemology , artificial intelligence , machine learning
Many previous studies identify loan, property, borrower and environmental factors that impact the probability of foreclosure. Implicit in these studies is the assumption that the property was purchased at fair value. We question this assumption based on several empirical findings regarding property value uncertainty. In contrast to previous research, we explicitly quantify the price premium from a hedonic pricing model. Using a comprehensive database of real estate transactions in Singapore during 1989–2000, we document a price premium associated with properties that are subsequently foreclosed based on actual sales transactions. In addition, we find that the premium paid at purchase significantly increases the probability of foreclosure. These results are robust and continue to hold after controlling for other property‐specific factors, time‐varying macroeconomic conditions, alternative model specifications and definitions of price premium.