Foreclosure Externalities and Individual Well-being: Evidence from the Great Recession

Using microdata from CoreLogic and Gallup between 2008 and 2014, we study the impact of foreclosures on individual well-being. We identify the causal effect of foreclosures by instrumenting them using variation in interest rate spikes associated with different types of adjustable rate mortgages (ARMs), conditional on controls and zipcode and time fixed effects. We find that a 10% rise in foreclosures is associated with a 0.53% and 0.23% decline in current and expected future life satisfaction. These effects are driven by a combination of lower local amenities (e.g., neighborhood quality) and greater uncertainty (e.g., income risk).