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"House Lock" – Negative Equity not Hurting Employment Numbers
“House lock” is not a major factor whenrnit comes to a homeowner’s ability to find a job. Arnworking paper commissioned by the Federal Reserve Bank of Boston found that,rnwhile many Americans lack mobility because their homes are “underwater” inrnrespect to their mortgages, this is only a marginal contributing factor to continuedrnunemployment.</p
Migration across states and amongrnhomeowners has fallen sharply at the same time as a widespread drop in housingrnprices has resulted in wide-spread negative home equity. According to CoreLogic, 10.7 million homes, 22.1rnpercent of all residential properties with a mortgage, were worth less thanrntheir mortgages at the end of the third quarter of 2011 and an additional 2.4rnmillion borrowers had less than 5 percent equity.</p
The nation’s unemployment rate hasrnhovered around 9 percent since early 2009. rnAt the same time, data from the Bureau of Labor Statistics show that,rndespite increasing numbers of job openings since June of 2009, there has beenrnlittle increase in hiring. Not only hasrnunemployment been especially persistent during this economic downturn, butrnindividuals have remained out of work for exceptionally long periods. Yet some employers state that they cannotrnfind workers with the right mix of skills suggesting that some type of mismatchrnmight be occurring. </p
Data from the Internal Revenue Servicernindicates that, while mobility across states has been declining gradually forrnmore than two decades, there has been a recent sharp downturn. While migration across labor markets is cyclical,rnthe drop during this recession has been larger than in other post-war recessions. It has also disproportionately involvedrnhomeowners. The number of home ownersrnwho moved cross-state between 2006 and 2009 fell by 25.5 percent versus arndecline of 13.6 percent among renters.</p
In their working paper, ArernAmerican Homeowners Locked into Their Houses? rnThe Impact of Housing Market Conditions on State-to-State Migration,</iAlicia Sasser Modestino and Julia Dennett of the Fed's New England PublicrnPolicy Center looked at these three factors to determine whether havingrnnegative equity in their homes prevents homeowners from relocating to statesrnwith better job markets.</p
The concept of “housing lock” is not newrnand a number of studies have examined how it might contribute to geographicrnmobility. However, much of the earlierrnresearch has been restricted either in terms of the geographic area studied,rnthe length of the study, or the group studied (i.e. younger households.). This was nationwide, included all demographicrngroups, and used a time period that roughly coincides with the recession. Thernstudy used a logistic regression framework to estimate the impact of negativernequity on migration while controlling for changes in relative economicsrnconditions and differences in time-invariant characteristics between origin andrndestination states. Finally the authorsrndid a “back-of-the-envelope calculation” to determine the potential impact ofrnrestricted mobility on the national unemployment rate.</p
The analysis found that negative equityrndid reduce cross-state migration between 2006 and 2009. A one-standard deviation increase in thernshare of underwater households in the origin state reduces the outflow ofrnmigrants to the destination state by 2.93 percent. For the average origin-destination pair thisrnmeant a reduction in out-migration between 0.595 to 0.578 per 1000 initialrnresidents or 85 migrants each year. rnSummed across all possible destination states this would mean a decreasernin the outflow from the average origin state of roughly 4,000 residents.</p
This is a small number relative to totalrnmigration in the U.S and reduces national migration by 0.05 percent or 110,000rnto 150,000 fewer individuals migrating across state lines in any given yearrncompared to observed migration in 2008-2009 of 5.6 million persons.</p
Assuming that all migrants who were constrainedrnfrom moving due to negative equity were unemployed and seeking a job and thatrnthey would have found employment in the new state, the absence of house lock</bwould have reduced the nation's unemployment rate by at most 0.10 percentagernpoints annually between 2006 and 2009 or a rate of 9.0 rather than 9.3 inrn2009. Recognizing that not all migrantsrnare job-seekers or would be successful in finding work after moving, “Yields arnnational unemployment rate that is virtually unchanged from the actual one thatrnprevailed in each year.” Therndisproportionate impact on the mobility of homeowners versus renters has norneffects on labor market statistics. </p
The authors conclude that it seemsrnreasonable for policymakers to focus on efforts that stimulate aggregate demandrnin order to reduce unemployment rather than policies to reduce negativernimpact. Instead, increased efforts tornalleviate the housing sector’s drag on the economy such as by assistingrnhomeowners to refinance or reducing foreclosures may be more effective inrnstimulating aggregate demand and reducing the high rate of joblessness.
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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