Capitalizing on Crisis, but How? The Foreclosure Crisis and Rising Corporate Investment in Housing

Maxwell Fineman, Princeton University

Between 2006 and 2012, corporate purchases of residential property doubled, and in the decade since, corporate investors have remained heavily involved in residential real estate markets. Existing research examines the implications of rising corporate ownership, but less is known about what precipitated this rise itself. Journalists and historians have suggested that investors took advantage of foreclosure-induced declines in property values when few others had the capital to invest. Although this narrative sounds compelling at first blush, identifying the effect of foreclosures on corporate investment presents two difficulties. First, foreclosures are endogenous. Naive models that estimate an association between foreclosure and corporate investment cannot differentiate between the effect of foreclosure itself and the conditions which lead to foreclosure. Second, studying the property-level effect of foreclosure on the probability of corporate purchase does not account for neighborhood-level spillover effects. Corporate buyers often employ investment strategies that target entire neighborhoods, not just individual properties. To the extent that foreclosure causes increased corporate investment, this effect may be a neighborhood dynamic as much as an individual property one. I overcome these difficulties using new large-scale administrative data on real estate transactions from Zillow to measure corporate investment activity and leveraging exogenous variation in state foreclosure laws to identify the effect of neighborhood foreclosure prevalence on corporate purchases. I find a counterintuitive result: an increase in the volume of neighborhood foreclosures reduces the share of residential real estate transactions with a corporate buyer. Disaggregating into short- and long-term effects shows that more foreclosures increases short-term corporate investment in a neighborhood but lowers the amount of long-term investment. These results suggest that foreclosures determine the investment strategies that corporate buyers employ and that these strategies follow a spatial pattern. Neighborhoods with high foreclosure rates experience more speculative investment, whereas low-foreclosure neighborhoods see more long-term corporate investment.

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 Presented in Session 219. Localized Governance: Eviction, Housing, and Advocacy