Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US — which has left many home-owners owing more on their house than it is worth — created a lock-in effect that depressed labor mobility.
This question has significance far beyond either the real estate market or the labor market, because there has been a persistent line of argument from some that the US’s current unemployment problem is not the result of insufficient demand, but is instead a “structural” problem resulting from the inability of the US economy to properly match people with available jobs. A frequent explanation for why it suddenly became difficult to match people with jobs in 2008 is that underwater mortgages have locked people in to their houses, reducing labor mobility and making job-matching more difficult.
The evidence presented in this paper indicates that the fall in house prices has indeed caused a “lock-in” effect, but has not significantly impacted labor market efficiency. Here’s the abstract:
The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater,” that is, owe more on their mortgage than their homes are worth. These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment states a recent paper by Colleen Donovan of Freddie Mac Underwater Homeowners are locked in their house.
The paper examines housing market turnover and finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.