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Tuesday, October 14, 2008

Research: Housing Busts and Household Mobility

by Calculated Risk on 10/14/2008 12:01:00 PM

Early this year I wrote:

Less worker mobility [due to negative equity] is kind of like arteriosclerosis of the economy. It lowers the overall growth potential.

Perhaps as many as 15 to 20 million households will be saddled with negative equity by 2009. Even if most of these homeowners don't "walk away", there might still be a negative impact on the economy due to less worker mobility.
In a new research paper, Fernando Ferreira, Joseph Gyourko (both from Wharton) and Joseph Tracy (New York Fed) quantify the impact of negative equity on household mobility: Housing Busts and Household Mobility, NBER, © 2008

How do housing busts affect residential mobility? The current market downturn has raised fears that local communities will suffer as social capital is depleted due to foreclosures forcing defaulting homeowners to move. One recent media report indicates that 220,000 homes were lost to foreclosure just during the second quarter of 2008, which is nearly triple the number over the same time period in 2007. Default-induced moves always are the first mobility-related impact observed during a downturn, but they need not be the last or the most importantly economically. In fact, much previous research indicates that factors such as falling home prices or rising interest rates that typically are associated with housing market declines can ‘lock-in’ people to their homes—reducing, not raising mobility.
And their conclusion:
Having negative equity in one’s home reduces mobility rates ... by nearly 50 percent from its baseline level according to our estimates. That the net impact of negative equity is to reduce, not raise, mobility certainly does not mean that defaults and foreclosures are insignificant consequences of this condition. However, it does signify that the preponderant effect is for owners to remain in their homes for longer periods of time, not to default and move to another residence.

Finally, reduced mobility has its own unique set of consequences which have not been clearly identified or discussed in the debate about the current housing crisis. Substantially lower household mobility is likely to have various social costs including poorer labor market matches, diminished support for local public goods, and lesser maintenance and reinvestment in the home.
emphasis added
The economic impact from less household mobility isn't quantified in the paper.

To size the problem: According to the Census Bureau, from 2005 to 2006, approximately 1.7 million owner-occupied households, moved to a different county or state. If approximately 1 in 6 households (the same proportion as with negative equity according to Moody's) will not accept a transfer now because of depressed home values that would be almost 300,000 households per year that will be reluctant to accept job transfers.

This will not only impact the earning potential of these households, but this could also impact the performance of various companies. A significant majority of households that migrate have incomes above the median - and negative equity situations will limit the ability of companies to transfer these senior employees. Less household mobility could be a signficant drag on the economy for several years.