mid-15c., "neighborly conduct, mutual friendliness," from neighbor (n.) + -hood. Modern sense of "community of people who live close together" is recorded by 1620s. Phrase in the neighborhood of meaning "near, somewhere about" is by 1857, American English. The Old English word for "neighborhood" was neahdæl. Middle English had neighborship (early 14c.), "neighborliness; neighborly acts," later "state of being neighbors."
word-forming element meaning "condition or state of," Middle English, from Old English -rede, from ræden "condition, rule, reckoning," a suffixed form of ræd "to advise, rule" (see rede). Common in Old English, less so in Middle English but still active in word-formation. It is analogous to -hood, which has replaced it in brotherhood, neighborhood, etc.; it survives in about 25 words.