How Stuck Are America's Homeowners, Really?
It’s widely assumed that America’s housing crisis, especially its large share of underwater homes, has undermined the economic mobility of its residents. Census data show American mobility at record lows and several widely cited studies have documented the mobility-staunching effects of the housing and mortgage crisis.
A study reported in last week in ProPublica questions this, suggesting that too much has been made of the connection. The study, by Federal Reserve Bank of Minneapolis economist Sam Schulhofer-Wohl, finds that owners of underwater homes are not as trapped by their circumstances as has been widely supposed. In fact, the paper argues that they are somewhat more likely to move than owners of homes that are worth more than their mortgages.
The new study supposedly updates and allegedly contradicts an earlier National Bureau of Economic Research (NBER) study, “Housing Busts and Household Mobility," by Wharton School economists Joseph Gyourko and Fernando Ferreria and New York Fed economist Joseph Tracy, which found that underwater home owners were 30 percent less likely to move.
Schulhofer-Wohl’s study argues that by counting only "permanent moves" - those where the owner sells the house and never returns - and ignoring the many cases where underwater home owners rent their homes or simply abandon them to foreclosure, Gyourko and his colleagues dramatically overstate the extent to which underwater home owners are "tethered to their houses," unable to move to places where there are more opportunities.
If true, this is major news, as it would indicate that some of the hardest-pressed Americans were regaining at least some of their mobility. And it would provide another sign of recovery in the labor and housing markets.
But when I clicked on the link to the NBER study in the ProPublica story, it took me not to the original study, but to a revised version dated September 2011, which was updated in response to Schulhofer-Wohl’s findings. This is what I read:
This paper provides updated estimates of the impact of three financial frictions – negative equity, mortgage lock-in, and property tax lock-in – on household mobility.
We add the 2009 wave of the American Housing Survey (AHS) to our sample and also create an improved measure of permanent moves in response to Schulhofer-Wohl’s (2011) critique of our earlier work (Ferreira, Gyourko and Tracy (2010).
Our updated estimates corroborate our previous results: negative equity reduces household mobility by 30 percent, and $1,000 of additional mortgage or property tax costs reduces household mobility by 10 percent to 16 percent. Schulhofer-Wohl’s finding of a slight positive correlation between mobility and negative equity appears due to a large fraction of false positives, as his coding methodology has the propensity to misclassify almost half of the additional moves it identifies relative to our measure of permanent moves.
This also makes his mobility measure dynamically inconsistent, as many transitions originally classified as a move are reclassified as a non-move when additional AHS panels become available. We conclude with directions for future research, including potential improvements to measures of household mobility.
I sent Professor Gyourko a note and asked him what's up. He responded promptly, and courteously. "Theory tells us that you would not expect any mobility effects unless the move is permanent in the sense that you sell your house," he wrote. "Why not? Because you only have to pay in cash the amount of your negative equity if you sell the home - i.e., when you have to pay off your mortgage balance. That's why you need to be conservative in counting only permanent moves that involve a sale."
"Census data tells us that mobility is extremely low these days," Gyourko adds. "If it’s not coming from trapped homeowners, what is the mechanism - lower renter mobility?" At the end of the day, as Gyourko told ProPublica, "The mobility effects [from the home-ownership crisis] are large."
All in all, it seems to me that both the conventional wisdom and the academic research on which it stands continues to hold.
Photo credit: Joshua Lott/Reuters