Tracing the Source of Liquidity for Distressed Housing Markets

Policymakers have been working to stabilize distressed neighborhoods since the 2008--2010 foreclosure crisis. We show that profit-seeking institutional investors purchased distressed properties and aided the recovery of local housing markets. Using a quasi-natural experiment in which investors purchased pre-packaged home portfolios, we find that average properties located within 0.25 miles of bulk-sold properties sell for 1.4% higher than homes located farther away. The spillover effect is greater for foreclosed homes (4.3%), homes in highly distressed neighborhoods (7.4%), and homes that are similar to the bulk-sold homes (2.5%). Our results show that institutional investors provided valuable liquidity which helped recover depressed home values. Importantly, this recovery was primarily market-driven, which contrasts with the numerous government-sponsored initiatives to stabilize local neighborhoods.