NCPA - National Center for Policy Analysis


January 23, 2009

Using two decades of American Housing Survey data from 1985-2005, the National Bureau of Economic Research estimates that negative home equity reduces homeowners' mobility.  Indeed, mobility is almost 50 percent lower for owners with negative equity in their homes than for those with positive equity.  In a weak housing market, it seems, households get "locked in" to their homes and are prevented from "moving up" to larger homes and better neighborhoods.

According to the researchers, pronounced shifts have occurred over time in house values, leverage and mobility rates.  For example:

  • 1985-1997 saw a substantial boom and bust in California housing markets; the data show a peak in mean nominal house prices of $253,617 in 1989, with an average loan-to-value (LTV) ratio of 67 percent, and a two-year mobility rate of just over 15 percent.
  • Prices in California began to fall around 1991, but did not bottom out until 1997 when they reached $201,693, with an average LTV of 78 percent, and a two-year mobility rate of only 11.7 percent.
  • From peak to trough, nominal prices fell by just over 20 percent, with the mean loan-to-value ratio increasing by 16 percent; it was not until 1998-9 that mobility returned to the pre-1989 peak levels, reaching 15.8 percent.
  • Other housing markets that experienced sharp swings in prices and loan-to-value ratios over time also show similar mobility patterns.

The researchers focused on the role of negative equity because households' equity positions vary significantly over the cycle and help to characterize housing busts.  They concluded that reduced mobility has its own set of consequences that have not been clearly identified or discussed in the debate about the current housing crisis.  Lower household mobility may result in poorer labor market matches, diminished support for local public services and facilities, and lesser maintenance and reinvestment in the home.

Source: Fernando Ferreira, Joseph Gyourko and Joseph Tracy, "Housing Busts and Housing Mobility," National Bureau of Economic Research, Working Paper, No. 14310, September 2008.

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