Hands up — looks like we’re gonna have to rethink one of our previous previous assumptions.
Sam Schulhofer-Wohl, a researcher at the Minnesota Fed, scutinised a previous study showing that an increase in negative equity (like what we’ve seen since the end of the housing bubble) harms labour mobility and therefore contributes to higher unemployment — and he found its methodology flawed.
Using the same data but correcting for the errors, it seems the opposite conclusion is true:
Some commentators have argued that the housing crisis may harm labor markets because homeowners who owe more than their homes are worth are less likely to move to places that have productive job opportunities. I show that, in the available data, negative equity does not make homeowners less mobile. In fact, homeowners who have negative equity are slightly more likely to move than homeowners who have positive equity. Ferreira, Gyourko and Tracy’s (2010) contrasting result that negative equity reduces mobility arises because they systematically drop some negative-equity homeowners’ moves from the data.
The previous study by Ferreira, Gyourko, and Tracy had dropped from its sample people who had either rented out their houses or simply left them vacant. When bringing these people back in, it turns out that homeowners are, as the paper notes, actually more likely to move than those with positive equity.
Schulhofer-Wohl also finds that the more negative a homeowner’s equity becomes, the more likely it is that the homeowner will move, as defaulting and leaving becomes the more attractive option.
But he is also cautious not to extrapolate too much, as the available data only cover the years from 1985 to 2005:
Negative equity was quite unusual until recently; people who have negative equity in 2010 may differ in a variety of ways from those who had negative equity four or more years ago, and negative equity may have different impacts on the mobility of different kinds of people. …
Conclusive work on the impact of negative equity in the current environment will therefore have to wait until more recent data are available. However, based on available data, there appears to be no evidence that negative equity reduces homeowners’ mobility.
Even so, the study further weakens the arguments of those who believe that structural factors are primarily responsible for the high rate of joblessness — but then, we were already sceptical of that idea, anyways.
Related links:
Double or quits? The structural unemployment question – FT Alphaville
Beveridge Redux – FT Alphaville