Neighbors’ Decisions – and Race – Matter for Mortgage Refinancing

Wednesday, March 23, 2022

Properly refinancing a mortgage can lead to lower mortgage payments and better interest rates. The decision to refinance is ultimately up to the homeowner. However, new research shows that these refinancing decisions are influenced by one’s neighbors, especially if they belong to the same racial group.

In his paper “Household Mortgage Refinancing Decisions Are Neighbor Influenced, Especially Along Racial Lines,” soon to be published in the Journal of Urban Economics, Purdue Assistant Professor of Management W. Ben McCartney and his fellow researchers examine how a homeowner’s immediate neighbors impact mortgage refinancing decisions.

Using data from deed registries and tax assessors’ offices in Los Angeles County, McCartney and his coauthors examine millions of households to gauge the influence of word-of-mouth interactions between neighbors on the decision to refinance a mortgage. They find that for each additional neighbor within 50 meters that refinances in the previous quarter, the average homeowner in Los Angeles County is 7% more likely to refinance their mortgage.

They also find that households are more than twice as influenced by neighbors of the same race compared to neighbors of a different race. This finding is in line with previous research that supports the notion that social interactions are more common between people of the same race and ethnicity.

The lack of communication between racial groups can be damaging for household wealth accumulation, since fewer interactions about refinancing can lead to households not refinancing enough. Many households do not refinance even when doing so could improve their credit, home equity, and liquidity.

These findings are especially relevant to minority households, who McCartney and his coauthors find are less likely to refinance. A negative feedback loop might exist here, where less neighbor interaction about the benefits of refinancing leads to fewer and fewer minority households choosing to refinance, and so on. This can lead to drastic financial consequences for minority households who may be overpaying each month.

More diversity within neighborhoods might narrow the racial disparity observed in mortgage refinancing. McCartney and his fellow researchers demonstrate that the social influence of neighbors of a different race is only substantial among the most diverse neighborhoods. Among the most racially segregated neighborhoods, the social influence of different race neighbors is essentially zero.

“I think neighbors are much more important than they’ve been given credit for,” says McCartney. “And I think a lot of pundits have written off neighbors, ‘the neighborhood is dead’ and whatnot. The evidence we're providing here is that neighbors and neighborhoods are still important in today's society.”

This innovative research provides evidence for and outlines the importance of word-of-mouth social interactions between neighbors. It also supplies policymakers with an incentive to focus on interventions and community building initiatives at the hyper-local level.

Writer: Wolf Williams, Purdue University Research Center in Economics (PURCE) Communications Specialist

Media inquiries can be directed to Nicole Brooks at brook113@purdue.edu and (765) 496-0307.