The narrator claims that there is a "drowsy, dreamy influence" pervading the landscape. The people of Tarry Town and Sleepy Hollow have differing mysterious theories for the eerie atmosphere of the area they live: 

Some say that the place was bewitched by a high German doctor, during the early days of the settlement; others, that an old Indian chief, the prophet or wizard of his tribe, held his pow-wows there before the country was discovered by Master Hendrick Hudson. 

Consequently, the townspeople share stories of myths and legends. There is gossip of some folks hearing voices, haunted areas, and tall tales. The most famous tale is that of the headless horseman. He had been a Hessian soldier during the Revolutionary War. The narrator adds that even outsiders who spend a little time in the Sleepy Hollow/Tarrytown area begin to have similar dreams and hallucinations. There is something about the landscape and/or the general culture of this small town that creates an atmosphere of mystery and superstition. 

The main reason for this history and continuing culture of supernatural interest is the fact that the area has remained the same over time. While the rest of the country is undergoing progress, Sleepy Hollow remains unchanged, isolated, as if it is stuck in time (in the past). These small towns and areas are, metaphorically, similar to small nooks or pools of water that sit off to the side (isolated, frozen in time) of the much faster current (historical progress): 

They are like those little nooks of still water which border a rapid stream; where we may see the straw and bubble riding quietly at anchor, or slowly revolving in their mimic harbor, undisturbed by the rush of the passing current.