Foreclosure deadweight?

Mike suggested for those interested in the foreclosure issue this paper.

That paper says this paper estimates the deadweight costs of foreclosures.

No it doesn’t ((This is one of those cases where something is so blindingly obvious that I think to myself that I must be missing something at a fundamental level. If this is the case, please school me.)). It measures (or attempts to measure) the price discount of foreclosed homes. It turns out for observably equivalent houses, foreclosed houses sell for 20-25% cheaper.

This means one of two things:

  1. There’s some unobserved thing about foreclosed homes that make them worth less
  2. Banks (or owners of the foreclosed property) sell them at a discount

Neither of these things is an inefficiency. In the first case, the price just reflects fundamentals. In the second case, the banks loss is exactly balanced by the buyers gain.

Now, what is inefficient about letting underwater houses foreclose?

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