The Local Effects of Foreclosures
108 Pages Posted: 14 Jun 2017 Last revised: 26 Dec 2019
Date Written: May 6, 2018
We exploit the staggered and discontinuous changes in interest rates among adjustable rate mortgages to identify the effects of foreclosures independently of housing prices. First, interest rate resets predict foreclosure, accounting for up to 18% of the change in foreclosures. Second, a 10% rise in foreclosures is associated with a 1.14% and 2.57% decline in non-tradables employment and hiring, respectively, accounting for up to 10% of the decline in the hiring rate between 2006-2011. Third, we introduce a new mechanism independent of housing prices whereby foreclosures reduce local optimism and raise uncertainty, thereby leading to a contraction of credit that affects hiring, especially small businesses.
Keywords: Employment, Foreclosures, Labor Markets, Mortgages, Uncertainty
JEL Classification: G21, J21, J23, R31
Suggested Citation: Suggested Citation