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American Economic Journal: Economic Policy: Vol. 5 No. 2 (May 2013)

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The Contagion Effect of Neighboring Foreclosures

Article Citation

Towe, Charles, and Chad Lawley. 2013. "The Contagion Effect of Neighboring Foreclosures." American Economic Journal: Economic Policy, 5(2): 313-35.

DOI: 10.1257/pol.5.2.313

Abstract

We examine the contagion effect of residential foreclosures and find strong evidence of a social interactions influence on default decisions where the interaction is based on neighbors’ behavior in a previous period. Using a unique spatially explicit parcel-level dataset documenting residential foreclosures in Maryland for the years 2006-2009 and a highly localized neighborhood definition, based on 13 nearest neighbors, we find that a neighbor in foreclosure increases the hazard of additional defaults by 18 percent. This feedback effect goes beyond a temporary reduction in local house prices and implies a negative social multiplier effect of foreclosures. (JEL R23, R31)

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Authors

Towe, Charles (U MD)
Lawley, Chad (U Manitoba)

JEL Classifications

R23: Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
R31: Housing Supply and Markets

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