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The Contagion Effect of Neighboring Foreclosures


  • Charles Towe
  • Chad Lawley


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)

Suggested Citation

  • Charles Towe & Chad Lawley, 2013. "The Contagion Effect of Neighboring Foreclosures," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 313-335, May.
  • Handle: RePEc:aea:aejpol:v:5:y:2013:i:2:p:313-35
    Note: DOI: 10.1257/pol.5.2.313

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    References listed on IDEAS

    1. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    2. Gerardi Kristopher & Willen Paul, 2009. "Subprime Mortgages, Foreclosures, and Urban Neighborhoods," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(3), pages 1-37, March.
    3. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
    4. Marianne Bertrand & Erzo F. P. Luttmer & Sendhil Mullainathan, 2000. "Network Effects and Welfare Cultures," The Quarterly Journal of Economics, Oxford University Press, vol. 115(3), pages 1019-1055.
    5. Harding, John P. & Rosenblatt, Eric & Yao, Vincent W., 2009. "The contagion effect of foreclosed properties," Journal of Urban Economics, Elsevier, vol. 66(3), pages 164-178, November.
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    Cited by:

    1. Niu, Yi & Ding, Chengri, 2015. "Unemployment matters: Improved measures of labor market distress in mortgage default analysis," Regional Science and Urban Economics, Elsevier, vol. 52(C), pages 27-38.
    2. Sampson, Gabriel & Perry, Edward, 2018. "Peer Effects in the Diffusion of Water Saving Agricultural Technologies," 2018 Annual Meeting, August 5-7, Washington, D.C. 274300, Agricultural and Applied Economics Association.
    3. Jeremy Burke & Kata Mihaly, 2012. "Financial Literacy, Social Perception and Strategic Default," Working Papers WR-937, RAND Corporation.
    4. Alm, James & Hawley, Zackary & Lee, Jin Man & Miller, Joshua J., 2016. "Property tax delinquency and its spillover effects on nearby properties," Regional Science and Urban Economics, Elsevier, vol. 58(C), pages 71-77.
    5. Christa Brelsford & Caterina De Bacco, 2018. "Are `Water Smart Landscapes' Contagious? An epidemic approach on networks to study peer effects," Papers 1801.10516,
    6. repec:eee:jfinin:v:30:y:2017:i:c:p:50-60 is not listed on IDEAS
    7. repec:eee:regeco:v:70:y:2018:i:c:p:300-311 is not listed on IDEAS
    8. Justin Sirignano & Apaar Sadhwani & Kay Giesecke, 2016. "Deep Learning for Mortgage Risk," Papers 1607.02470,, revised Mar 2018.
    9. Gerardi, Kristopher & Rosenblatt, Eric & Willen, Paul S. & Yao, Vincent, 2015. "Foreclosure externalities: New evidence," Journal of Urban Economics, Elsevier, vol. 87(C), pages 42-56.
    10. William M. Doerner & Andrew V. Leventis, 2013. "Distressed Sales and the FHFA House Price Index," FHFA Staff Working Papers 13-01, Federal Housing Finance Agency.
    11. Rana, Ghulam Awais & Shea, Paul, 2015. "Estimating the causal relationship between foreclosures and unemployment during the great recession," Economics Letters, Elsevier, vol. 134(C), pages 90-93.
    12. repec:eee:enepol:v:113:y:2018:i:c:p:559-570 is not listed on IDEAS
    13. Brown, Martin & Schmitz, Jan & Zehnder, Christian, 2016. "Social Norms and Strategic Default," Working Papers on Finance 1608, University of St. Gallen, School of Finance, revised Jun 2017.
    14. Alm, James & Leguizamon, J. Sebastian, 2018. "The housing crisis, foreclosures, and local tax revenues," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 300-311.
    15. Cohen, Jeffrey P. & Coughlin, Cletus C. & Yao, Vincent W., 2016. "Sales of Distressed Residential Property: What Have We Learned from Recent Research?," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 159-188.
    16. Sampson, Gabriel & Perry, Edward & Hendricks, Nathan P., 2017. "The Role of Peer Effects in Resource Extraction - The Case of Kansas Groundwater," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258286, Agricultural and Applied Economics Association.

    More about this item

    JEL classification:

    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets


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