Falling Housing Prices and Labor Mobility

If there is no mortgage involved then I agree with you. A co-worker and I arrived at the same conclusion during a recent conversation.

But what of the effects of having a mortgage? Especially the people who bought at the peak with no money down.

If they sell the house for less than the principle on the mortgage they are going to still be liable for the difference which is going to affect their ability to obtain a loan for the next house.

Is that not true?

I agree that endowment and loss-aversion may play a significant role in the decision to move, but is there something else?

I remember something from my early principles courses several decades ago. We discussed characteristics of productive resources, and one of the characteristics of labor that stood out in my mind was "immobility."

It was defined as a general aversion for labor to readily move to meet market conditions. Growing up in Michigan during the last half of the 20th century, I saw anecdotal evidence all the time.

As GM moved out of Flint, I was astounded by the number of old-time factory hands who, after being let go would refuse to move to TN, OH, or other places where new plants were being constructed. They were

"waiting for the plants to reopen" in Flint.

Another example was an attempt (in the 1980s, I think) by the then Big Three to help reinvigorate Detroit's schools. The

auto companies, along with a few other big employers came to the schools with an offer of guaranteed jobs if the students graduated with a guaranteed minimal skill level. One reason it was shot down, I was told, was that the jobs were not necessarily going to be in Detroit. The parents objected heavily and that was that.

Again, I know anecdotes are not data, but if human resources are "immobile" by nature, that may be a factor. Or it may be that endowment and loss-aversion are the reasons for the immobility. I don't recall seeing any studies on this.

It seems to me that the two conflicting directions of this effect don't affect all sectors of the labor pool equally. I would expect lower housing prices to make younger, less experienced, and poorer workers *more* mobile (as they are less likely to already own a house that they have to unload, and benefit from lower prices at their destination). Whereas older, wealthier, and more experienced workers would be more likely to be tied down by a house that they weren't willing to take a loss on. So I can imagine an effect, though whether it constitutes a distortion I can't say...

bbartlog wrote, "Whereas older, wealthier, and more experienced workers would be more likely to be tied down by a house that they weren't willing to take a loss on. So I can imagine an effect, though whether it constitutes a distortion I can't say..."

Yet, if they've owned the house for, say, 10 or 20 years, then there is no loss.

Unless, of course, they maxed out an equity loan against it at the peak of the market.

I would think that falling house prices distort labor markets contribute to immobility, but I think that has less of an impact than the general costs, financial and emotional, of moving.

1) If you have school-age kids, the emotional cost to your family of changing schools.

2) If you live close to extended family, the emotional cost of not being close. Of course air travel makes that less of an issue than 100 years ago, but it still is a factor. My wife is 2000 miles from her folks and sister and that has been hard on her as we've had small kids.

3) You will have some "loss aversion" if you're afraid that three months after you move you find out about the perfect job in your old city. Sure you could accept the job and move back, but by then, you've already spent so much and began to get acclimated. Emotional costs.

4) The fear of finding new social circles in the community.

5) All of the financial costs of movers, etc.

I guess what I'm saying is that I think labor markets are already fairly immobile and this issue is temporary and not the biggest contributor.

But to your point about it being a reflection of prosperity, I don't think it reflects a general level of prosperity, but rather a relative level of prosperity. We know from the Depression that people will relocate to find jobs when the situation becomes dire enough to warrant it (benefits > costs). Because we don't see lots of people moving to find new jobs simply tells me that the (perceived) costs of doing so exceed the (perceived) benefits.

I'll second Marcus's basic sentiment. Home buyers may face significant constraints in the loanable funds market. If they sell their house at a 50,000 loss, there is no way for them to get a mortage at the apprased value +50,000 for a new home, even if it means a significantly higher salary at a new place, high enough to pay the loss of 50,000 to the bank.

This might be of interest to "non behavioral economists." In a slightly different contex (although not too different) Greg Mankiw has entertained to possiblity of home ownership causing higher unemployment.

Marcus, your argument works in the short term, I think. The two groups you mention-- those with 0% down mortgages and maxed-out home equity loans-- are definitely in a worse position to find jobs. If not, I'd like to see a solid explanation why not.

But because the 0% down mortgage resembles an option with frequently realized upside (financing a house you can't quite afford), and a large but rare downside, it makes me think that your argument shouldn't be made directly after a housing bubble has burst unless you weigh it against the benefits these borrowers gain in normal, non-decreasing times.

Murthaduck would say that people have an "inherent right" to live and have good jobs where they are for life. They should have to relocate at all, because the social costs are too high. Well, if liberal Democrats like Murthaduck hadn't ruined places like Flint, MI in the first place, GM wouldn't have needed to move right? Murthaduck never REALLY looks at the root causes of problems, only at the Communist "solutions".

In the short run, falling prices makes selling a home difficult -- who would buy if the price is just going to drop tomorrow?

I guess it depends on where they are and where the opportunities are.

$50,000 isn't that big a deal on a 30 year mortgage...depending on the prices of homes in an area. The interest rates and monthly payments are the greater concern.

Some years ago, during a small real estate slump here in Australia, a Dutch colleague complained that we did not know how to manage these things.

In Holland, he said, when house prices dropped banks etc all agreed to ignore any drop until prices came back to "normal". No-one could sell at less than "proper value" except with special permission in an emergency. He thought that a wonderful solution. "No one suffered" he explained.


I wonder if that still applies?


Though come to think of it, Hillary Clinton's promised moratorium comes pretty close.

Ken:

Well if their little Communist utopia works in Holland, more power to them. I'm not against voluntary Communist utopian experiments. IT all falls in line with my libertarian ideals. However, I don't think you could just impose that system in America w/o a VERY bloody civil war.

"So why should people's disappointment at being unable to sell their homes at prices as high as they once thought possible not be offset by their happiness at being able to buy new homes at prices lower than they once thought possible?"

Consider the possibility that 1) they cannot sell at any price, or 2) cannot get close to clearing the mortgage in a fire sale situation, or 3) the house at the other end is much higher in price.

And of course where are these better jobs? Does Don buy the Bush-ite view of the labor market?

Marcus' argument is spot on. Selling a house you're upside down in (commonly called a "short sell") is a horrendously drawn out process. In Rancho Santa Margarita, CA, a town next to mine, a real estate broker tells me that almost half the current inventory is short sells. These can take up to three months to complete a purchase in a non-declining market, but may take even longer as prices decline. You'd think the banks would want to unload them quickly, but they make the purchases near impossible. It creates a three-tiered market where new short sells are priced relatively low, regular properties in the middle, and older short sells high, with the spread currently about $60K on homes in the $400K - $500K range.

People with good credit, however, or not too terribly many blemishes and good cash consistent cash flow, have lots of opportunities now. There's not much press about the great deals they are starting to find.

The best option is of course to default on the loan, and let the bank take the loss.

The bank generally won't even kick you out of your house until they think they can sell it. Houses which aren't lived in tend to fall apart, so its just a better idea to let the defaulters keep living there. Plus, eviction laws rarely allow banks to kick anyone out on short notice.

All in all it sounds like a good deal to homeowners to me, just like the dot-com boom was a great deal to software developers.

And of course where are these better jobs? Does Don buy the Bush-ite view of the labor market?

Posted by: save_the_rustbelt | Apr 3, 2008 10:28:24 PM

Ah, another straw man to compete with murthduck's vast straw armies. Keep it up rusty.

I wonder if behavioral economists would someday classify as "rational" behavior those things that are irrational in terms of the standard textbook definition, but that come to be popularly employed - such as the supposed unwillingness of people to move as you indicate above.

That said, my home here in Western, MA (the Berkshires) has lost $40,000 or so of value since I bought it a year ago. But a great job prospect opened up for me, and I am selling it - for a loss, to move our family to a better situation, both job-wise and in terms of a better place to raise children. I'm even taking a slight salary reduction to do it (large compensating differential however).

That said, my home here in Western, MA (the Berkshires) has lost $40,000 or so of value since I bought it a year ago. But a great job prospect opened up for me, and I am selling it - for a loss, to move our family to a better situation, both job-wise and in terms of a better place to raise children. I'm even taking a slight salary reduction to do it (large compensating differential however).

-- Posted by: wintercow20 | Apr 4, 2008 7:49:00 AM

If you don't mind me asking, do you have a mortgage against the home? If so, are you expecting to be able to clear the mortgage from the sale of the home?

Also, not to be too personal, will you be left with sufficient cash reserves after the sale to make a down payment on the new home?

I ask these things because I suspect it is these particular issues which may reduce mobility.

That said, my home here in Western, MA (the Berkshires) has lost $40,000 or so of value since I bought it a year ago. But a great job prospect opened up for me, and I am selling it - for a loss, to move our family to a better situation, both job-wise and in terms of a better place to raise children. I'm even taking a slight salary reduction to do it (large compensating differential however).

-- Posted by: wintercow20 | Apr 4, 2008 7:49:00 AM

If you don't mind me asking, do you have a mortgage against the home? If so, are you expecting to be able to clear the mortgage from the sale of the home?

Also, not to be too personal, will you be left with sufficient cash reserves after the sale to make a down payment on the new home?

I ask these things because I suspect it is these particular issues which may reduce mobility.

Well the unfortunate fact is that usually you move from a depressed place with lower prices for houses into a growing part of the economy where house prices could even be rising but that is all part of the costs and benefits of mobility.

Since it is relevant to the issue of mobility let me tell you that while being an Executive Director at the World Bank and seeing the construction of houses for people that had to move out because of the construction of a dam, I just asked that instead the money should be given to the resettlers in cash, instead of chaining them down to a place… and I wrote the following in my book “Voice and Noise”

Get them out of here!

NO WAY! I do not believe that we are doing right in resettling poor people in places where they will basically continue to do the same and most certainly continue to be poor. If any of the resettled fathers or mothers were to ask any of us EDs privately, “If you were in our situation, would you keep your children here?”—we would probably have to say, “No way! We would get them out!” And, if that is so, we are not doing our development work right. Sorry.

Marcus,

You make a good point. However, I agree with Grant as well. If a home buyer is already upside down in his mortgage, what incentive does he have to continue to pay the mortgage at all? If he bought a home with zero down just a couple of years ago, he really doesn't have any equity in the house. Even if he's not moving for a new job, there is no incentive to stay in the home and continue to pay the mortgage. The incentive to simply walk away from the mortgage seems high with or without alternative employment opportunities.

Of course, as you point out, the situation is different for people who have significant equity in their homes. However, selling the house is not the only option. One can rent out the existing home and either buy or rent a home in the new location.

Actually, Marcus, having thought about it some more and rereading the scenario you describe in your initial post....

The scenario you illustrate is one where people are upside down in their mortgage and have no or very little equity in the house. These people would simply walk away from their mortgage rather than try to sell the house. Since renting is always an option, they don't need to come up with a downpayment. So, I don't think I can agree with your argument. Even if the home owner has some equity in the house, the loss has already occurred whether the homeowner chooses to realize the loss or not. Foregoing a better job opportunity to further gamble in real estate by staying in a home which has depreciated in value solely because you're anchored to a particular price is just a stupid decision.

Consider the possibility that 1) they cannot sell at any price, or 2) cannot get close to clearing the mortgage in a fire sale situation, or 3) the house at the other end is much higher in price.

1.) There is always a price

2.) They walk away from the mortgage and don't even try selling (this is happening)

3.) They rent the house in the new location.

Methinks, you make a good point about walking away from a mortgage. It certainly another factor to consider.

However, I'd like to point out that walking away is not cost free. It puts a black mark on your credit rating. How much a person values their credit rating and what it means to their future access to credit must be a factor to weigh against how much they're 'upside down'.

Marcus, I agree with you on the credit rating point. I think that it depends on how underwater they are. Their credit rating may be worth $10,000 to them but it may not be worth $200,000. The fact that bad credit rolls off after 7 years also mutes the cost of the black mark.

It'll be interesting to see the rate of abandonment relative to the differential between home value and the mortgage amount. I think that may be a pretty good indicator of how much people are willing to pay for their credit score.

I was offered a great job last summer on the opposite coast. My real estate broker thought the market was tough, but that I'd be able to sell my house at about break-even to where I recently purchased it. So I moved my family into a temporary apartment on the opposite coast and started the new job while trying to sell the house.

About two months later, my real estate agent told me that I'd have to sell my house at a $200,000 loss (if it could sell at all) since I'd now be in competition with several foreclosure sales in the neighborhood.

Luckily, I've been able to find a renter for the house, and my family is dealing with living in an apartment, but I've got to admit that had I fully known the real-estate market situation, I might not have taken the new job.

Marcus, regarding a decline in credit representing a cost-- perhaps the loss of credit is actually part of a closed system in which all credit is preserved. After all, we are just evaluating one person's credit relative to the rest.

Not to say that for every decline in one's credit score there is a gain in someone else's, but perhaps the standard of what is deemed "good credit" is lowered. If, in a class of 300 where the final exam is graded on a curve, 100 people fail, the professor will adjust the curve.

It'll be interesting to see the rate of abandonment relative to the differential between home value and the mortgage amount. I think that may be a pretty good indicator of how much people are willing to pay for their credit score.

-- Posted by: Methinks | Apr 4, 2008 12:45:19 PM

That's an excellent observation.

i think the question is simply - are you more or less mobile if you rent vs. own...or is the cost of moving higher if you rent vs. own?

i think the answer would be unequivocally yes.

the second question is - has the rate of homeownership significantly deviated from its historic norm?

but based on research i did several years ago - i recall the historic rate being either 63% or 69% and the only statistically significant factor causing a deviation in the rate of homeownership is the cost of interest. the mortgage interest deduction is merely a subsidy towards prices paid.

i would further say unequivocally that the rate of homeownership has increased and therefore the mobility of the labor force has been reduced.

now compound this by the fact that the marginal increase has been comprised of marginal workers (rather than a pro rate distribution of the overall workforce) that form the swing factor in the labor markets.

now why should we keep these people in houses they can't afford when it negatively impacts the labor market and therefore the economy?

Bring back debtors prisons. America is starving for a lack of values, welching on your debts is one of the worst things a person can do.

Fair questions Marcus. I should be able to clear the mortgage. I put about $50,000 down on the house. So after expenses, I will probably have lost most of that. Even if I have to sell for less, I have some cash saved (not much) to pay off the mortgage. I'm real sensitive to not paying my obligations - so I will pay off the mortgage and get moving. I am moving to a place where house values are roughly half of what they are (ok, more like 60-65%) in the Berkshires - our options are to rent and save pennies for a year or two while accumulating enough for a new down payment (now that I have lost this one), or since my credit score is really high, believe it or not, some banks are still willing to offer me mortgage(s) with far less than 20% down.

I am not in as bad a shape as the fellow that is dealing with a $200k loss, in that case I would probably reconsider, but it still a pretty big whack to my "balance sheet" to move - but the opportunity is better - not just for me, but for my wife and our children too. In the long run we'll more than make up for it.

Ptk,

You're still probably better off moving for the new job. The $200K loss in the value of your house has occurred whether you sell it or not. If you stay in the house and forgo the job opportunity, you are not guaranteed to recoup that $200K - especially not in real dollars. The cost of taking that additional real estate gamble is all the forgone benefits associated with the new job.

It may not feel like you're better off right now, but it really does look like you made the better decision. Having said that, I realize the loss in the value of your house is not exactly an enjoyable outcome for you and I hope you and your family find comfort and success in your new location.

I'm sorry, the above post should have been addressed to Transplant.

PTK,

Ah! The mobility option. Home buyers are short the option and renters are long the option.

Until recently, 20% down was standard. Given that model, the NPV of buying and renting is the same. The only things that skewed the equation was the lifestyle choice and the valuation of the mobility option. Zero-down mortgages made buying more attractive than renting in part because there was no need to account for the opportunity cost of the down payment. This also meant lending standards became so lax that the buyer received a free call option and a very cheap put option. If real estate prices went up, the buyer benefited. If prices went down, the zero-down buyer had nothing to lose by walking away. He can simply put the house to the lender at the relatively small cost of some reduction in his credit rating. I think that the more this happens, the cheaper that put option becomes. Mpkomara's post on the subject of relative credit scores makes sense to me. Given this, I don't think that zero-down buyers actually sold the mobility option when they purchased their houses. If that's true, then the housing effect on the mobility of labour should be more muted than one would otherwise expect. In fact, a bailout may decrease mobility. No?

You know Methinks, I think you've summed it up quite well. I like the use of investing terms which cut right through the political rhetoric and gets right down to the incentives.

Yet, I'm not convinced yet that one can actually simply 'walk away'.

A quick Google search seems to indicate that it depends upon the state.

Anti-deficiency laws

Apparently not all states have them. So in those states the borrow will still be held responsible for the difference.

Also, it should be noted, apparently anti-deficiency laws don't apply to second mortgages. So for people who are upside-down because of a second mortgage are also responsible for the difference.

Do you have any information contrary to that?

It would be interesting to see if there is any correlation between state anti-deficiency laws and the housing bubble.

Marcus, I fully accept that "walking away" may not always be as easy as I assumed. In fact, until I read your latest post, I had no idea that there were anti-deficiency laws. Thanks for the link.

I agree that it would be interesting to see if there is any correlation between anti-deficiency laws and housing bubble - particularly the effects of the bursting of the bubble.

Just thinking about it....I suppose most people are unaware of such laws when they take out a mortgage and become aware of them only when they find themselves unable to pay their mortgage, so it wouldn't effect their decision to take a mortgage. Once they discover the law, I wonder how much it effects their decision to "walk away". It would be interesting to know if the rate of people handing in their keys to the lender is lower in states without anti-deficiency laws. I expect that would depend on how often the lenders exercise their option to pursue borrowers for the deficiency. If that rate is low, then we would probably see no significant differences in the rates of "walk-aways" and vice versa. I suspect that the rate of deficiency recovery is probably low because even if the lender wins a judgment, it may not be able to collect it (these are not the most prudent and responsible borrowers after all). Thus, I suspect that the expected value of pursuing recovery of the deficiency is negative and lenders rarely, if ever, seriously try to recover deficiencies. Obviously, I could be very wrong.

Besides differences in walk-away rates, the differences in credit spreads would also tell us if the lack of anti-deficiency law has a deterrent effect. However, the differences would have to be normalized for a few effects - the unique characteristics of the housing market in each state and other laws and restriction that would impact walk-away rates and credit spreads, for instance.

Somebody must be doing this research somewhere.

By the way, there is a real issue with moving away from a house you own - you can only deduct mortgage interest from a primary house you live in :)

Surprise #2 is that AMT is not fond of depreciation on a rental property, compared with primary home mortgage interest deduction. Ooops!

Fortunately, my new job pays a heck of a lot more than my old job....