Academic journal article Federal Reserve Bank of New York Economic Policy Review

Housing Busts and Household Mobility: An Update

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Housing Busts and Household Mobility: An Update

Article excerpt

1. INTRODUCTION

A long literature on housing economics has noted that a rise in mortgage rates could "lock-in" an owner to his or her current house, thereby slowing or preventing a permanent move to a new residence if mortgage interest rates rise sufficiently to make the new debt service payment unaffordable (see, for example, Quigley [1987, 2002]). Other financial frictions--such as the one arising from California's Proposition 13 property tax rules, which essentially imply an often large increase in property taxes after a move--would have similar effects on household mobility (Ferreira 2010). Negative equity, by which we mean the current value of the house is less than the outstanding mortgage balance, could also reduce mobility if the owner lacks sufficient liquidity to pay off the full loan balance, which is required for a permanent move and sale of the property if the borrower is to avoid the cost of a default (Stein 1995; Chan 2001; Engelhardt 2003).

These three potential financial frictions are all associated with the sale of the house, so there is a transfer of economic ownership, not just a change of residence. Thus, the type of household mobility that may be impacted by these frictions involves permanent moves in which both physical location and economic ownership change for the previous owner. The housing literature on financial frictions does not have clear implications for temporary moves in which the owner leaves the house for a period of time--perhaps to rent it out--and returns at a later date. Overall, mobility reflects permanent and temporary moves, but the appropriate mobility measure depends on the question being addressed. Given our focus on the impact of financial frictions on homeownership transitions, our preferred measure in the analytics reported below reflects only permanent moves as best as possible.

Interest in the relationship between homeowner mobility and financial frictions, especially frictions associated with negative home equity, was piqued for researchers and policymakers by the recent extraordinary boom and bust in U.S. housing markets. With house prices falling 30 percent nationally, the prevalence of negative equity greatly expanded across many markets. More recently, the sharp fall in mortgage interest rates and the various policy interventions to encourage refinancing at historically low rates suggest that we also need to update our knowledge of the impact of mortgage interest rate lock-in effects, as they seem likely to become important after Federal Reserve interest rate policy normalizes.

Because the studies cited above were dated or based on samples from specific geographic regions or population subgroups, our first paper (Ferreira, Gyourko, and Tracy 2010) used the U.S. Census Bureau's American Housing Survey (AHS) panel from 1985-2007 to provide new and more general estimates for the nation that include all three forms of financial frictions in the same econometric specification. Our paper's three primary results were: 1) owners with negative equity were one-third less likely to move than otherwise observationally equivalent owners without negative equity; 2) for every additional $1,000 in mortgage debt service costs, mobility was about 12 percent lower; and 3) similar increases in property tax costs from Proposition 13 in California also reduced mobility by about 12 percent.

This article updates our previous work in two important ways. It adds data from the most recent AHS for 2009, providing the first evidence from the beginning of the bust in home prices in many markets. It also addresses Schulhofer-Wohl's (2011) criticism of our sample selection procedures used in Ferreira, Gyourko, and Tracy (2010). We demonstrate that those selection procedures are appropriate for studying the effect of negative equity (and the other financial frictions noted) on permanent moves. This update also documents that our previous findings are robust to the inclusion of new data and new measures of permanent mobility, which we discuss more fully below. …

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