Locked In The House: Do Underwater Mortgages Prevent Mobility?

June, 2012

Colleen Donovan

Charles River Associates

Calvin Schnure

NAREIT®

Disclaimer: Research and views presented are those of the authors and do not represent Charles River Associates or NAREIT®

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Mobility declined during the recession

Table 1: Per cent of county population that moved, by distance and tenure

Owner Occupied

2007 2008 2009 2010

Stayed in same house 92.2% 92.9% 93.3% 93.4%Within County 4.5% 4.1% 3.9% 3.9%

Within State, New county 1.7% 1.5% 1.4% 1.4%Out of state 1.3% 1.3% 1.0% 1.0%

Renter Occupied

2007 2008 2009 2010

Stayed in same house 68.3% 68.4% 68.8% 69.3%Within County 20.2% 20.1% 20.5% 20.3%

Within State, New county 5.7% 5.7% 5.4% 5.2%Out of state 4.6% 4.5% 4.3% 4.1%

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Did “housing lock” prevent moves, thereby causing higher structural unemployment?

The Beveridge Curve

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(The UK Beveridge Curve)

The Beveridge Curve

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“Housing lock” … or a “perfect storm” for default?

Underwater homeowners are “locked in”, unable to sell their home and move, unless they pay in substantial sums.

Housing lock interferes with the job matching efficiency if underwater owners can’t move to take a new job.

Housing lock could raise structural unemployment; see the shift in the Beveridge Curve.

Or… An unemployed, underwater homeowner in an economically-

depressed area is a “perfect storm” for default.

This is not a “win-win” situation—there are many costs from these defaults—but a higher structural unemployment is not one of them.

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Which hypothesis is best supported by the data?

The American Community Survey reports mobility by geography: moves within-county, to a new county within state, or out of stage.

Freddie Mac House Price Index, by county.

Demographic control variables.

Two questions: Is there evidence of housing lock? Do house price declines have similar effects on

housing-related and job-related moves?

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Reasons 2004-2005 2008-2009

HOUSING RELATED 61.8 57.2

Wanted to own home, not rent 12.2 6.6 Wanted new or better housing 24.4 18.6 Wanted better neighborhood 4.8 6.2 For cheaper housing 8.7 13.9 Other Housing reason 11.7 11.9

JOB RELATED 6.7 8.9

New job or job transfer 2.3 2.1 To look for work or lost job 0.5 1.0 For easier commute 3.3 5.0 Other 0.6 0.7

OTHER 31.5 33.9

TOTAL 100.0 100.0

Within County

Housing-related moves did fall… but job related moves increased.

Source: Frey (Brookings, 2009)

2004-2005 2008-2009

22.4 13.7

4.0 1.57.3 2.52.0 1.63.5 3.95.6 4.2

34.0 46.1

25.5 33.23.0 7.31.6 1.93.9 3.7

43.6 40.2

100.0 100.0

Between States

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Empirical Approach

ycysycycyc XHPAMobility ,1,1,, **

yc

ycyc p

pMobility

,

,, 1

log

And, p is the share of the owner occupied housing residents that changed residences in the last year.

Where,

1

1

1

1

Positive

gativeSlightlyNe

Negative

veVeryNegati

HPAIf (t-1) yoy hpa <-11If –11<= (t-1) yoy hpa <-6If –6 <= (t-1) yoy hpa <0If 0 <= (t-1) yoy hpa

• HPA defined by four dummy variables:

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Strong evidence of housing lock: Total mobility plunged in counties with the worst house price declines.

(1) (2)

HPA very negative -0.93*** -0.61***

HPA negative -0.56*** -0.42***

HPA slightly negative -0.27*** -0.22***

State & Year Fixed Effects Y Y

Controls Y

Observations 2,311 2,311

R-squared 0.084 0.393

(Coefficients translated into average ppt. effect on total mobility, relative to HPA positive)

Control variables (not reported) include lagged Dec-to-Dec change in unemployment rate (-), foreclosure rate (-), renter mobility(+), % owner occupied (-), % owner occupants aged 65+, % owner occupants in family households (-), % owner occupants with children, % some college education(+), % bachelors degree or higher, median household income, % moved in since 2005(+), % with mortgage (+), median # rooms in owner occupied homes. Bold font denotes significance at <=10% in regression (2).

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But out-of-state moves increased from counties where house prices fell the most.

(Coefficients translated into average ppt. effect on mobility, relative to HPA positive)

Control variables (not reported) include lagged Dec-to-Dec change in unemployment rate, foreclosure rate, renter mobility(+), % owner occupied(-), % owner occupants aged 65+ (+), % owner occupants in family households, % owner occupants with children, % some college education(+), % bachelors degree or higher(+), median household income, % moved in since 2005(+), % with mortgage(+), median # rooms in owner occupied homes. Bold font denotes significance at <= 10% in regression (1).

New County, Out-of-State Same State

Within-County

(1) (2) (3)

HPA very negative 0.37*** -0.22** -0.50***

HPA negative 0.21* -0.08 -0.44***

HPA slightly negative 0.12 -0.07 -0.20***

State & Year Fixed Effects Y Y Y

Controls Y Y Y

Observations 2,311 2,311 2,311

R-squared 0.247 0.262 .229

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Renter mobility was unaffected by house price declines

(Coefficients translated into average ppt. effect on mobility, relative to HPA positive)

Control variables (not reported) include lagged Dec-to-Dec change in unemployment rate, foreclosure rate, renter mobility, % owner occupied(+), % owner occupants aged 65+(-), % owner occupants in family households(+), % owner occupants with children (-), % some college education(+), % bachelors degree or higher(+), median household income (-), % moved in since 2005(-), % with mortgage, median # rooms in owner occupied homes(+). Bold font indicates significance at <=10% in regression (1).

New County.

Total Mobility Out-Of-State Within State Within-County (1) (2) (3) (4)

HPA very negative 0.00 -0.11 -0.06 0.26

HPA negative 0.03 -0.01 -0.18 0.27

HPA slightly negative 0.02 0.05 -0.17 0.07

State & Year Fixed Effects Y Y Y Y

Controls Y Y Y Y

Observations 2,311 2,311 2,311 2,311

R-squared 0.172 0.119 0.190 0.104

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Conclusions

There is strong evidence of housing lock—mobility declined 30% or more in areas with sharpest house price declines and increases in unemployment.

A plunge in local moves—which are more often motivated by housing issues—is responsible.

Moves out-of-state, in contrast, are higher in areas with greatest house price declines. Long-distance moves are more often in response to job opportunities.

Housing lock is not responsible for higher structural unemployment.

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Conclusions II

Not entirely good news! Many (most!) underwater movers defaulted on their mortgage.

There are frictions for employed, underwater homeowners.

House price declines have other effects on household net worth, confidence, that are weighing on the economy.

Policy implications: Higher structural unemployment would not respond to

traditional macro policies, but Our results suggest that unemployment is elevated because

of the shortfall in aggregate demand. Monetary and fiscal policy are better-suited to address this problem.

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Appendix

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Literature - Housing Lock Effect

Prior to the crisis… Quigley (1987) and (2002)

Favorable mortgage terms decrease homeowner mobility. Effect is modest. Oswald (1997), Green and Hendershott (2001)

Homeownership associated with higher unemployment. Munch, Rosholm and Svarer (2006) and Coulson (2007) find other household

characteristics likely offset lock-in effect.

Since 2005… Ferreira, Gyourko and Tracy (2010)

Find economically large impact of equity on mobility Sample ends in 2005. Schulhofer-Wohl (2010) finds results sensitive to dropped

observations. Do not consider reason for move or distance of move. Molloy, Smith, Wozniak (JEP, forthcoming)

Recent decline in internal migration is continuation of longer-term trend. Limited role of housing market contraction and recessions.

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Literature-Recent Changes In Labor Market Efficiency

Estevao and Tsounta (2011) Regional skill mismatch has increased during the recession. Do not explicitly examine mobility.

Barnichon, Elsby, Hobijn and Sahin (2010) Construction accounts for more than 1/3 of Beveridge curve gap.

Barnichon and Figura (2011) Exceptionally low labor market matching efficiency during 2008-2009. No evidence that housing lock contributed to efficiency declines.

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Data

County-level observations of mobility by tenure and distance of move, house price declines, and demographic and economic controls. Sample: counties with populations greater than 65,000

Sources: 1-year American Community Survey, Freddie Mac House Price Index, and Bureau of Labor Statistics

Time period: 2007-2009, with one-year lagged December-over-December house price and unemployment changes.