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Working Papers

An Economic Analysis of Housing Abandonment

Working paper #307
Benjamin P. Scafidi, Michael H. Schill and Susan M. Wachter

• Housing abandonment has been a major problem for New York City costing the city over one billion dollars in redevelopment expenditures. We model abandonment as the final stage of the disinvestment expenditures. We construct a data warehouse of financial, physical, and valuation data, including tax liens, mortgage and building violations from nine New York City agencies, for approximately one million properties. Using these property specific data and foreclosure experience, a property risk indicator is constructed to predict in advance which properties will be abandoned. We show that it is possible to identify those properties for which disinvestment will precede to abandonment and foreclosure with a high degree of accuracy.
• The decision to abandon a building as analogous to the exercise of a put function is modeled. When the sum of all mortgage and municipal liens against a property exceeds its market value and when faced with the decision of either paying delinquent taxes or having the City divest it of the building, an owner will choose the latter option. This option theory of abandonment is tested using the property-specific data set of residential buildings in New York City for the period of 1990 to 1996. Whether a property’s lien-to-value ratio exceeds one is a highly significant variable, both statistically and economically, with respect to abandonment providing strong support for the option theory of abandonment.

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