Are underwater homes deterring unemployed people from moving to get new jobs? Not according to a new study from the Federal Reserve Bank of Cleveland, which finds that homeowners will relocate for a job, even if they will lose money on the sale of their home.
The study found that “the lock-in effect,” a term coined to help explain why joblessness persisted so stubbornly during the recovery’s first fitful years, is really a myth.
After the financial crisis, the number of homeowners who relocated from one state to another declined. At the same time, the number of homeowners who were underwater, i.e., owed more than their house was worth, increased. Some studies suggested that the decline in mobility rates was caused by homeowners being locked in to their underwater homes, contributing to higher unemployment rates.
However, the data used in those earlier studies had many limitations. Using anonymous data from two major credit bureaus, a team of researchers, including the Cleveland Fed’s Yuliya Demyanyk, were able to obtain information about the mortgage debt of tens of millions of individuals. Their study found compelling evidence that equity in a home is not a crucial part of the decision to relocate for a job. In fact, underwater homeowners are probably more likely to move than borrowers with equity in their homes.
Says Demyanyk, “If an unemployed homeowner with negative equity is able to find a job in another region, he or she is likely to accept the job because the benefits of earning a higher income outweigh the costs associated with selling an underwater home.”
One story that made the media rounds during the recession and early recovery claimed that underwater homes – when people owe more than the property’s value – were deterring unemployed people from moving to get new jobs. People with negative equity could sell only at a loss, an option so unattractive that they refused to pull up stakes in search of work.
“If a hypothetical unemployed, underwater homeowner gets a job offer, he is going to take it,” Demyanyk said.
The study was twofold. First, the researchers looked at credit-report data. The reports gave them enough longitudinal information about borrowers to infer whether they moved to new regions and whether falling home prices limited mobility – particularly for people with negative home equity.
Next, the researchers designed a theoretical model to replicate the experience of real-world homeowners. It churned out results suggesting that the findings – that underwater homeowners weren’t reluctant to move – were plausible. Key to the model is the idea that people would rather move to get a steady paycheck than stay in an underwater home in a place with no job prospects.
This paper is not the first to debunk the lock-in-effect story. Others, including work by the San Francisco Fed, have likewise found little evidence that people didn’t move during the recession because of the condition of their mortgages.
More plausible is that Americans faced almost uniformly dismal employment options across the country – opportunities to move for good jobs were few and far between.
An implication for national policymakers is that job creation efforts need not focus on the regions hit hardest by the housing bust. Consider that at the end of 2009, the underwater problem was concentrated in four “sand” states – Arizona, Florida, California, and Nevada – and in Michigan, all with negative equity rates topping 35 percent of total mortgages. If national policymakers thought only about creating jobs in those states out of fear that negative-equity borrowers wouldn’t move to other states for employment, they might be missing an opportunity to lift employment more broadly.