The Effect of Underwater Mortgages on Unemployment

Kevin Mumford and Katie Schultz

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: It has been frequently claimed that the high unemployment rates during the 2007-2009 U.S. recession and the slow decline in unemployment rates during the subsequent economic recovery are partially due to an increase in structural unemployment driven by a reduction in mobility that was caused by house lock. The claim is that underwater homeowners those that owe more on their mortgages than their homes are worth are more likely to choose to stay in their home rather than move to cities where they would have been better able to find employment. Using restricted-access data from the Panel Study of Income Dynamics, we compare the mobility and employment of homeowners with mortgages that go underwater to similar homeowners that do not find themselves underwater during the housing bust. We find that underwater homeowners are twice as likely to move and are no more likely to experience a period of unemployment. These results are robust to a variety of specifications. We find evidence that how far underwater a house goes can have an important influence on the mobility choice where homeowners with a large amount of negative equity are more likely to move a short distance and homeowners with a smaller amount of negative equity are more likely to move to a new MSA. There is also evidence of heterogeneous effects by education and income level. However, we find no evidence to support the claim that underwater mortgages caused an increase in structural unemployment.

Keywords: Housing; Mobility; Unemployment (search for similar items in EconPapers)
JEL-codes: J61 J62 J64 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-06
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1274

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