Desperate House Sellers : Distress Among Developers

I study how firm internal capital markets spread local housing shocks across geographically separate regions. I analyze this question in the context of the home builder industry during the 2006-09 housing crisis. I show that home builders who experience large asset write downs in one area, choose to subsequently sell homes in unaffected, healthy housing areas at a discount, in order to raise cash quickly. Consistent with the theory of internal capital markets, financially constrained firms are more likely to cut prices of homes in healthy, unaffected areas in response to losses in affected, unhealthy ones. I also find that firms smooth shocks across projects only during the crisis and not during the boom. Since distressed home sales also depress prices of neighboring homes, these findings indicate that builder internal capital markets are an important channel for geographic contagion of negative economic shocks