1. 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®

2. 1 Mobility declined during the recession Table 1: Per cent of county population that moved, by distance and tenure Owner Occupied 2007200820092010 Stayed in same house92.2%92.9%93.3%93.4% Within County4.5%4.1%3.9% Within State, New county1.7%1.5%1.4% Out of state1.3% 1.0% Renter Occupied 2007200820092010 Stayed in same house68.3%68.4%68.8%69.3% Within County20.2%20.1%20.5%20.3% Within State, New county5.7% 5.4%5.2% Out of state4.6%4.5%4.3%4.1%

3. 2 Did “housing lock” prevent moves, thereby causing higher structural unemployment? The Beveridge Curve

4. 3 (The UK Beveridge Curve) The Beveridge Curve

5. 4 “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.

6. 5 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?

7. 6 Housing-related moves did fall… but job related moves increased. Source: Frey (Brookings, 2009)

8. 7 Empirical Approach And, p is the share of the owner occupied housing residents that changed residences in the last year. Where, If (t-1) yoy hpa <-11 If –11<= (t-1) yoy hpa <-6 If –6 <= (t-1) yoy hpa <0 If 0 <= (t-1) yoy hpa HPA defined by four dummy variables:

9. 8 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 EffectsYY ControlsY Observations2,3112,311 R-squared0.0840.393 (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).

10. 9 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 negative0.37***-0.22**-0.50*** HPA negative0.21*-0.08-0.44*** HPA slightly negative0.12-0.07-0.20*** State & Year Fixed EffectsYYY ControlsYY Y Observations2,3112,3112,311 R-squared0.2470.262.229

11. 10 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 negative0.00 -0.11 -0.06 0.26 HPA negative0.03 -0.01 -0.18 0.27 HPA slightly negative0.02 0.05 -0.17 0.07 State & Year Fixed EffectsY Y Y Y ControlsY Y Y Y Observations2,311 2,311 2,311 2,311 R-squared0.172 0.119 0.190 0.104

12. 11 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.

13. 12 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.

14. 13 Appendix

15. 14 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.

16. 15 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.

17. 16 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.