The Local Effects of Foreclosures

131 Pages Posted: 14 Jun 2017 Last revised: 2 Dec 2018

See all articles by Christos Makridis

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Michael Ohlrogge

New York University School of Law

Date Written: May 6, 2018


We exploit the staggered and discontinuous changes in interest rates among holders of adjustable rate mortgages (ARMs) to identify the effects of foreclosures on local labor market outcomes independently of housing prices. First, these interest rate resets are highly predictive of foreclosure even after controlling for a range of individual characteristics, accounting for up to 18% of the change in foreclosures between 2008-2011 among the counties with the highest concentration of these loans. Second, using the plausibly exogenous variation in these interest rate resets, 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, these adverse labor market outcomes arise from foreclosure-induced declines in local optimism and increases in uncertainty, which led to a contraction of commercial bank lending particularly towards small businesses. Our results support models of the financial crisis with a flight to quality and panic in the credit market.

Keywords: Employment, Foreclosures, Labor Markets, Mortgages, Uncertainty

JEL Classification: G21, J21, J23, R31

Suggested Citation

Makridis, Christos and Ohlrogge, Michael, The Local Effects of Foreclosures (May 6, 2018). Available at SSRN: or

Christos Makridis (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Michael Ohlrogge

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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