New evidence that being underwater on your house limits labor mobility

by on December 2, 2011 at 6:11 am in Economics | Permalink

Rortybomb has long argued there is no significant effect.  I’ve never had a horse in this race, in any case here are new results from Plamen Nenov, on the job market from MIT:

The present paper studies the impact of a housing bust on regional labor reallocation and the labor market. I document a novel empirical fact, which suggests that, by increasing the fraction of households with negative housing equity, a housing bust hinders interregional mobility. I then study a multi-region economy with local labor and housing markets and worker reallocation. The model can account for the positive co-movement of relative house prices and unemployment with gross out-migration and negative co-movement with in-migration observed in the cross section of states. A housing bust creates debt overhang for some workers, which distorts their migration decisions and increases aggregate unemployment in the economy. This adverse effect is amplified when regional slumps are particularly deep as in the recent U.S. recession. In a calibrated version of the model, I find that the regional reallocation effect of the housing bust can account for between 0.2 and 0.5 percentage points of aggregate unemployment and 0.4 and 1.2 percentage points of unemployment in metropolitan areas experiencing deep local recessions in 2010. Finally, I study the labor market effects of two policies proposed for addressing the U.S. mortgage crisis.

I’m still not taking sides here, just fyi.

1 Andrew M December 2, 2011 at 6:35 am

Homeownership alone limits labor mobility, not just negative equity. Renters have the freedom to quickly relocate for small gains in income; owners will only relocate for a significant opportunity. Europe is a case in point: Germany and Switzerland have low levels of homeownership and many people rent; whereas in Spain, Italy, and Greece, the rental market is much smaller.
Obviously there are many other differences between Switzerland and Spain; a statistical analysis couldn’t possibly separate out all those factors. But intuitively and logically, this makes sense.

2 Tim December 2, 2011 at 10:01 am

Maybe. Renters are more likely to be locked into year+ long leases though. Which means counter-intuitively that owning a house might be easier to get out of then renting an apartment.

3 Noah Yetter December 2, 2011 at 4:06 pm

“locked”? All it’ll cost you to get out of your lease early is 1 or 2 months’ rent. I have personally done this to take a job 1800 miles away. Yeah it sucked losing ~$2200 but A) it was easily worth it and B) that’s a LOT smaller loss than an underwater homeowner is facing.

4 JonF December 3, 2011 at 12:06 pm

Many house leases (including my last three) have early-out clauses that permit termination with 60 or 90 days notice.

Also, taking a couple month’s rent loss doesn’t pollute one’s credit record as a foreclosure does, unless it becomes a matter of court judgment.

5 Willitts December 3, 2011 at 12:12 am

Selling a home costs 4-6% in realtor fees alone.

The transfer taxes in my state are more than losing two months of rent on a canceled lease.

6 Jamie December 3, 2011 at 1:47 am

Just to pile on, this is false. I have broken leases three times. Once, I arranged for someone else to take over the lease. Once, I paid two month’s rent (well, one, and let them keep security, but this was NYC, so I didn’t expect my security back anyway). Once, I talked to my landlord, and for whatever reason, he didn’t mind.

This is of course anecdata, but it is also the experience of my entire cohort. I can think of one person who had a serious problem breaking a lease. That was in 2010, in Las Vegas.

I made a bad decision in the early aughts, and still own property in Tennessee that nobody wants to buy for 1/4 what I paid. Property tax is low enough that I’m doubling down. We’ll see what happens. At the very least, when the tide comes in because of global warming (I’m currently at 52′ above sea level, not counting being on the second floor), I have somewhere to make a last stand against the zombie-looter hordes, iphonle I can make it out of my coastal elitist bubble in time.

7 J December 2, 2011 at 8:22 am

I suspect that next year you will link to the paper of a job market candidate studying the effect on job market canditates’ placement of a link to their job market paper by Tyler Cowen ?

8 Rahul December 2, 2011 at 12:28 pm

Does Tyler link to more MIT job seekers than GMu? Is there a signal?

9 DW December 2, 2011 at 8:37 am

So… people don’t want to sell when they’re underwater?

Is that so controversial a point?

10 Not evidence, unless I'm missing something. December 2, 2011 at 8:44 am

Unless I misread the abstract you posted, there doesn’t seem to be any empirical evidence to support this claim in the paper.

What he does is a “calibration exercise” — i.e. a model that assumes the link exists, and then, further assuming certain parameter values, provides a calculation of the impact.

Ummmmm.

SInce when does that constitute an empirical finding?

Look, as Andrew M pointed out, any home ownership will naturally limit mobility.

I’d think that underwater mortgagees are MORE likely to cut the chains to their house, so that if you control for the effect on home ownership, being underwater will actually INCREASE mobility.

11 Eric Johnson December 2, 2011 at 10:44 am

That would depend on if you are in a recourse or non-recourse state.

12 sc December 2, 2011 at 11:41 am

His calibration exercise aside (as I haven’t read it yet), his empirical motivation is the finding that the larger the share of negative equity, the less out-migration but no effect on in-migration. It’s correlational only at that stage, but that’s apparently novel for this literature. I think that the note that home ownership limits mobility is the counterfactual in this study. Within a group of owned homes, negative equity is even moreso negatively correlated with out-migration.

13 Bill December 2, 2011 at 8:54 am

I think underwater housing is limiting interregional mobility of the non-working elderly, and at the same time amplifying it, in ways which will cause retirement states to pay more for medical care in the future.

It used to be that the elderly would move to Florida and Arizona, and when they got sick, moved back to where they came from. I bet interregional senior mobility is down, which should increase the costs to sunshine states for those elderly who previously moved back.

Underwater housing could also be amplifying regional moves as well: I know older people who have moved to Florida and Arizona simply because the real estate is so cheap now. This may amplify interregional mobility of the elderly, who then become cost to these states if they don’t move back.

14 zrzzz December 2, 2011 at 9:22 am

A single-payer plan would make this issue go away. Let those red states suffer the folly of the system they wanted so badly.

15 JonF December 3, 2011 at 12:03 pm

Huh? How many seniors moved home if they got sick? More commonly their adult children or grandchildren moved to Florida or Arizona to be with them. Both states had pretty hot economies until the crash came, so finding a new job there was no big deal. My aunt and uncle retired to the St Pete area in the early 80s, and over the years most of their kids and grandkids drifted down there too, so I now have a huge gaggle of extended family in that area. Heck, I even lived there for a while.

16 zrzzz December 2, 2011 at 9:00 am

There’s no mobility problem, just walk away from the house. It’s bank greed that leads to housing inflation. They have the power to limit prices by refusing to issue unrealistic mortgages. Unfortunately, they are never forced to suffer the consequences, so they’re incentivized to gamble.

17 Ken Rhodes December 2, 2011 at 9:28 am

Any plan that begins with the word “just” is suspect, at best.

My son moved from Virginia to Arizona some years ago. He sold his house in Virginia and bought a house in Arizona. Subsequently the market value of his house plummeted. Simultaneously, the housing market crash caused collateral damage to the industry he was employed in–concrete. His work hours shrank to the point where he could not afford to support his family. He wanted to move back east, but he couldn’t sell his house.

First he tried to negotiate with his bank. Not to reduce his principal, which he felt an obligation to. Rather, just to refinance at the going rate, which was substantially lower than the rate he was paying. That would have enabled him to keep his underwater house. The bank stalled him repeatedly, basically saying “tough luck, Bunky, pay up.” Which carried the implication, unstated, “How else are we going to continue to make all this profit every year?”

So he did as you suggested–he turned his underwater house over to the bank and walked away. The problem, of course, was the word “just.” He had no equity, so he got back no money with which to make a down payment on a house here. Further, he got a huge blot on his credit, which is going to be difficult to recover from.

My son and his family are back East, renting a small home in a low-cost area in eastern North Carolina. But the word “just” never was part of his plan, nor of his result.

18 Urso December 2, 2011 at 10:12 am

The word “just” is almost always followed by something someone *else* should do.

19 Cliff December 2, 2011 at 10:05 am

What? What about recourse loans (the majority of loans)? And banks certainly do suffer the consequences of default.

20 JonF December 3, 2011 at 10:12 pm

Unless you have significant assets, recourse is a fiction. People who are already unemployed and broke usually do not have major assets. They are basically judgment proof, and the banks know it.

21 Ted Craig December 2, 2011 at 9:52 am

Mobility declined with the increase of women in the workforce. A move today requires two guarantees of employment, not just one.

22 Anthony December 2, 2011 at 10:54 am

Probably true, but that effect would have largely worked through well before the housing boom and bust.

23 GinSlinger December 2, 2011 at 3:17 pm

But what’s the relationship between marital status and homeownership? I don’t think I can think of more than two single homeowners I have ever met. (Note: not trailer, nor condo/townhome, but a house.)

24 JonF December 3, 2011 at 12:00 pm

In a healthy job market a spouse can find a new job much more quickly and so would be willing to take the chance when moving. Note that voluntary job leaving of any sort has become much less common during this economy. So no, spousal job lock was not as large a factor five years ago as now.

25 TallDave December 2, 2011 at 12:30 pm

This always struck me as blindingly obvious. Hell, I don’t even want to sell my townhouse I’m moving out of, I’m going to rent it out until the market turns (decades, if need be).

26 Willitts December 3, 2011 at 12:30 am

Same here.

The problem is that the cap rate of renting is so low, you’re better off selling.

But if you sell now, then you realize and lock in the loss immediately. Most people don’t have excess cash lying around to make the right economic decision. It might be worth the hit to your credit to walk away – repairing your credit will take three years.

27 Foo Fighter December 2, 2011 at 12:40 pm

You’re scared of offending conservatives, too, huh?

Welcome to President Obama’s world.

28 TallDave December 2, 2011 at 4:15 pm

If only they could scare him into cutting spending back to 2007 levels.

29 NAME REDACTED December 3, 2011 at 8:07 am

+1

30 Rahul December 2, 2011 at 1:12 pm

Well, naturally. SCUBA gear is usually pretty bulky.

31 Robert December 2, 2011 at 11:54 pm

All these failed Specu-Vestors used to bore us with tales about how they’re going to lip their houses and make a killing. They ruined our economy, and I feel no sorrow for their predicament.

32 Willitts December 3, 2011 at 12:25 am

72 pages telling us what anybody on the street could tell us in less than 10 seconds. His main contribution seems to be the magnitude of the effect.

“Hence we finally get:
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I’ve got a policy Rx for you: government paid moving vans to get the deadbeats out and the patient renters in. Why are we subsidizing the dumb debtors? (This goes back to the European debt piece)

You misspelled his name: it’s Plamen.

His works in progress seem interesting.

33 JonF December 3, 2011 at 11:57 am

Why would any sane unemployed person turn down a job offer in another state just because he can’t sell the house for what it’s worth? Being unemplpoyed he’s unlikely to be keeping up with the payments anyway. The rational thing to do is to move and either A) rent the house out B) seek a short sale or C) just let it go to foreclosure. I’ve known people in this situation who have done each of those things.

I suspect that a far more important consideration is the fact that most couples have two workers nowadays, and relocating means the already working partner becomes unemployed– and can’t collect benefits because s/he quit voluntarily to move. When our office in Boca Raton closed in 2008 our depatment was offered relocation to new jobs in Baltimore. No one rejected that offer because of home ownership worries, although they were in Florida and, yes, couldn’t sell underwater houses. (Four of those who made the move ended up renting out their houses) But people did reject the offer due to family concerns.

34 MPH December 4, 2011 at 9:40 am

I recently hired an employee who lives in DC. He is underwater on the two condos he owns – and so can’t move to NYC until his spouse finds a job here too, since they wouldn’t be able to afford the rent-mortgage deficit on one income…and it isn’t easy to find a job remotely. Had he been further away than DC, I’m not sure he’d be able to make the weekly commute as he does now.

Definitely anecdotal – but I can’t see how being underwater can do anything but harm labor mobility.

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