The Contagion Effect of Neighboring Foreclosures on Own Foreclosures

Charles Towe and Chad Lawley (2010)

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In this paper, we examine a highly localized contagion effect of foreclosures and find strong evidence that social interactions influence the decision to foreclose. We utilize a hazard model and a unique spatially explicit dataset documenting parcel level residential foreclosures in Maryland for the years 2006 through 2009. We combine these data with tax and assessment data, loan data, Census, and unemployment data. These data allow us to control for important factors influencing the likelihood of foreclosure within a given community, including the prevalence of subprime loans and the distribution of socioeconomic characteristics. Additionally, we use the tax data to construct variables describing individual homes, surrounding homes, and community. These variables include structural characteristics of houses, their price history, and length of ownership.