The Local Effects of Foreclosures
131 Pages Posted: 14 Jun 2017 Last revised: 2 Dec 2018
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: Suggested Citation