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The relationship between household mobility and financial frictions, particularly those associated with negative home equity, has attracted increased attention after the recent boom and bust in the U.S. housing markets.
With prices falling 30percent nationally, negative equity expanded greatly across many markets.
The drop in mortgage rates, along with policy interventions to encourage historically low-rate refinancing, likewise recommend a closer look at mortgage interest rate lock-in effects, which are likely to become important once Federal Reserve interest rate policy normalizes.
This article updates estimates published in a 2010 study by the authors of the impact of three financial frictions—negative equity, mortgage interest rate lock-in, and property tax lock-in—on household mobility. The addition of 2009 American Housing Survey data to their sample allows the authors to incorporate the effect of more recent house price declines.
The new study’s findings corroborate the 2010 results: Negative home equity reduces household mobility by 30percent, and $1,000 of additional mortgage or property tax costs lowers it by 10 to 16percent.
The study also explains that reduced homeowner mobility may not have a significant impact on the unemployment rate, yet reduced mobility attributable to financial frictions has economic and social effects beyond its possible implication for labor markets.
The authors offer directions for future research, such as potential improvements to measures of household mobility.
About the Authors
Fernando Ferreira is an associate professor in the Department of Real Estate and Department of Business Economics and Public Policy at the University of Pennsylvania’s Wharton School; Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate at Wharton; Joseph Tracy is an executive vice president and senior advisor to the Bank President at the Federal Reserve Bank of New York.
The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.