Property tax delinquency and its spillover effects on nearby properties

• One homeowner's financial distress is likely to affect nearby homeowners.
• This paper investigates the impact of property tax delinquency on nearby properties.
• We use a sample of delinquent properties for Chicago, Illinois during 2010 to 2013.
• We find large, negative, and significant price effects of delinquent properties.
• We estimate a negative spillover of 2.5% to 5.1% (or $6310 to $12,872).

This paper investigates the impact of property tax delinquency on the sales price of nearby residential properties, an effect that we call the “delinquency discount”. We use a sample of 34,500 home sales and the population of delinquent properties for Chicago, Illinois during the period 2010 to 2013. We focus on the delinquency discount for properties within the same Census Block. We also examine the effect of delinquency duration on neighboring properties, as this measures the level of their financial distress. We estimate the magnitude of the delinquency discount using several alternative estimation methods, in each case controlling for local foreclosure activity. Our preferred method is a matching estimator, as it works to eliminate the potential for omitted variable bias that is common in this type of estimation. We find large, negative, and statistically meaningful effects of delinquent properties for which the local government has placed a tax lien and has put the lien up for sale to private investors. For properties with a tax lien that are not successfully sold, we estimate a negative spillover of 5.1% ($12,872) on surrounding properties. Properties with a tax lien that are sold to private investors have a smaller, but still negative impact on surrounding property values of 2.5% ($6310).