The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
Regional & Community Outreach connects the Bank to Main Street via structured dialogues and two-way conversations on small business, mortgages, and household credit.
Economic Education improves public knowledge about the Federal Reserve System, monetary policy implementation, and promoting financial stability through the Museum and programs for K-16 students and educators, and the community.
Authors: Fernando Ferreira, Joseph Gyourko, and Joseph Tracy
Interest in the relationship between household mobility and financial frictions, especially frictions associated with negative home equity, has grown following the recent boom and bust in U.S. housing markets. With prices falling 30percent nationally, negative equity greatly expanded across many markets. More recently, the decline in mortgage rates along with various policy interventions to encourage refinancing at historically low rates suggests the need to also revisit mortgage interest rate lock-in effects, which are likely to become important once Federal Reserve interest rate policy normalizes. In this article, the authors update their estimates (from Ferreira, Gyourko, and Tracy ) of the impact of three financial frictions—negative equity, mortgage interest rate lock-in, and property tax lock-in—on household mobility. By adding 2009 American Housing Survey (AHS) data to their sample, the authors incorporate the effect of more recent house price declines. They also create an improved measure of permanent moves in response to Schulhofer-Wohl’s (2011) critique of their earlier work. The authors’ updated estimates corroborate their previous results: Negative equity reduces household mobility by 30percent, and $1,000 of additional mortgage or property tax costs lowers mobility by 10 to 16percent. Schulhofer-Wohl’s finding of a zero or a slight positive correlation between mobility and negative equity appears to be due to a large fraction of false positives, as his coding methodology tends to misclassify almost half of the additional moves it identifies relative to the authors’ measure of permanent moves. This also makes his mobility measure dynamically inconsistent, as many transitions originally classified as a move are reclassified as a nonmove when additional AHS data become available. The article concludes by suggesting directions for future research, including potential improvements to measures of household mobility.