The Contagion Effect of Neighboring Foreclosures

41 Pages Posted: 31 May 2011

See all articles by Charles Towe

Charles Towe

University of Connecticut - Department of Agricultural and Resource Economics and the National Center for Smart Growth

Chad Lawley

University of Manitoba - Department of Agribusiness and Agricultural Economics

Date Written: May 7, 2011

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 data set 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 as much as 28%. This feedback effect goes beyond a temporary reduction in local house prices and implies a negative social multiplier effect of foreclosures.

Keywords: Social Interaction, Foreclosure, Hazard model, Spillovers

JEL Classification: C31, R31, G01

Suggested Citation

Towe, Charles and Lawley, Chad, The Contagion Effect of Neighboring Foreclosures (May 7, 2011). Available at SSRN: https://ssrn.com/abstract=1834805 or http://dx.doi.org/10.2139/ssrn.1834805

Charles Towe (Contact Author)

University of Connecticut - Department of Agricultural and Resource Economics and the National Center for Smart Growth ( email )

1376 Storrs Rd
University of Connecticut
Storrs, CT 20742
United States

HOME PAGE: http://www.are.uconn.edu/faculty_charlestowe.php

Chad Lawley

University of Manitoba - Department of Agribusiness and Agricultural Economics ( email )

Winnipeg, MB, R3T 2N2
Canada

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