Housing Busts May Lower Household Mobility
In a weak housing market households get 'locked in' to their homes and are prevented from 'moving up' to larger homes and better neighborhoods.
Using two decades of American Housing Survey data from 1985-2005, researchers Fernando Ferreira, Joseph Gyourko, and Joseph Tracy estimate that negative home equity reduces homeowners' mobility. Indeed, mobility is almost 50 percent lower for owners with negative equity in their homes than for those with positive equity. In a weak housing market, it seems, households get "locked in" to their homes and are prevented from "moving up" to larger homes and better neighborhoods.
In Housing Busts and Household Mobility (NBER Working Paper No. 14310), the researchers conclude that this does not imply that current worries about defaults and owners having to move from their homes are entirely misplaced. However, history suggests that the lock-in effects of negative housing equity and high mortgage interest rates were dominant.
The biennial American Housing Survey covers metropolitan areas across the United States. The data allow the researchers to track residence histories and mobility patterns under a variety of housing market conditions. The authors maintain it is important to recognize that lower mobility can be observed only over time, so it will take some years to know how the impact of negative equity will play out in this cycle. They also emphasize that housing market conditions are not the same over time. For example, the subprime market was much smaller over most of their sample period, so the underlying riskiness of borrowers probably was lower in the past than today. In addition, their sample is restricted to owner-occupied homes and excludes investors and second homes, both of which may respond differently to negative equity situations.
Ferreira, Gyourko, and Tracy note that pronounced shifts have occurred over time in house values, leverage, and mobility rates. For example, 1985-97 saw a substantial boom and bust in California housing markets. The data show a peak in mean nominal house prices of $253,617 in 1989, with an average loan-to-value (LTV) ratio of 67 percent, and a two-year mobility rate of just over 15 percent. Prices in California began to fall around 1991, but did not bottom out until 1997 when they reached $201,693, with an average LTV of 78 percent, and a two-year mobility rate of only 11.7 percent. From peak to trough, nominal prices fell by just over 20 percent, with the mean loan-to-value ratio increasing by 16 percent. It was not until 1998-9 that mobility returned to the pre-1989 peak levels, reaching 15.8 percent. Other housing markets that experienced sharp swings in prices and loan-to-value ratios over time also show similar mobility patterns.
The researchers focus on the role of negative equity because households' equity positions vary significantly over the cycle and help to characterize housing busts. To measure negative equity, they construct the homeowner's current LTV ratio using the value of the mortgage balance and the owner's self-reported current value of the house. They also factor in demographic information that influences mobility, including changes in family size, age, race, education, the sex of the household head, marital status, the change in marital status of the household head, and gains and losses in family income.
Ferreira, Gyourko, and Tracy report that being married is not a statistically significant predictor of mobility, but divorce is. Household mobility also increases with the education of the household head. Whites are more likely to move than non-whites, and male-headed households are less likely to move than female-headed households. Each additional year of age reduces household mobility until the household head reaches the early fifties; after this point, aging raises the likelihood of a move. Finally, larger households tend to move less frequently. This is consistent with the hypothesis that children increase the transactions costs involved in moving.
The researchers conclude that reduced mobility has its own set of consequences that have not been clearly identified or discussed in the debate about the current housing crisis. Lower household mobility may result in poorer labor market matches, diminished support for local public services and facilities, and lesser maintenance and reinvestment in the home.
-- Matt Nesvisky