[House Lock] Does Negative Equity Cause Unemployment?

Posted by Jonathan J. Miller -Wednesday, February 8, 2012, 2:41 PM
1 Comment

This research paper from the Boston Fed addresses the issue of “House Lock” – the idea that people who have negative equity on their homes are trapped and can not migrate to where the jobs are.

…These observations have raised concerns that the prolonged weakness in the U.S. housing market is keeping unemployment high by preventing homeowners who have negative equity from relocating to other states with better job markets. Having a negative equity position in their homes is likely to further deter homeowners from selling in an already weak housing market. Other options, such as engaging in a short sale or strategically defaulting on the loan, can be costly in terms of lost value or a damaged credit record. And in all likelihood, the number of underwater households is likely to persist as house prices continue to fall in many areas due to continually high levels of unemployment and foreclosure.

The report concludes that there is NOT a strong correlation between people stuck in their homes and the high unemployment rate.

home owners are already less transient than renters and account for only 20% of state-to-state migration. negative equity reduces the probably of migration but does not impact unemployment rates.

Still it seems to me that Fed has become much more focused on housing as the way to fix the economy as of late. Of course, this is not official Fed policy speaking in this paper, but with what feels like an increase in housing related research (or I am super sensitive to this as of late), maybe it represents the “Id” of the Fed mindset. You can see it in the last sentence of the paper:

Instead, increased efforts to alleviate the housing sector’s drag on the economy— such as helping more homeowners to refinance or stemming the tide of foreclosures—may be more effective at stimulating aggregate demand and reducing the high rate of joblessness during the recovery.

Are American Homeowners Locked into Their Houses? The Impact of Housing Market Conditions on State-to-State Migration [Federal Reserve Bank of Boston]

View the original article here