Tuesday, April 14, 2009

Housing crisis and labor mobility

I have blogged previously here and here, highlighting the benefits of labor mobility and how conventional wisdom in housing policy formulation may be working against this objective. Since the recession started in the US in December 2007, internal migration has slowed down considerably, with only 11.9% of Americans moving house between 2007 and 2008 — the most sluggish pace since records began in the 1940s.

The Economist draws attention to the work of Joseph Gyourko and Fernando Ferreira who have found that housing busts and the resultant effects of negative equity and rising mortgage rates locks-in people to their homes and reduces labor mobility. They also find that substantially lower household mobility is likely to have various social costs including poorer labor market matches, diminished support for local public goods, and lesser maintenance and reinvestment in the home.

Similarly, Andrew Oswald of University of Warwick had found that excessive home ownership kills jobs and that this effect was stronger than tax rates or employment law, and therefore argued against government subsidizing home ownership. He also observed that, in Europe, nations with high rates of home ownership, such as Spain, had much higher unemployment rates than those where more people rented, such as Switzerland.

He also argued that if there are few homes to rent, jobless youngsters living with their parents find it harder to move out and get work, and immobile workers become stuck in jobs for which they are ill-suited, which promotes inefficiency by raising prices, reducing incomes and making some jobs uneconomic. They find that mobility gets reduced by almost 50% for owners with negative equity in their homes. Areas with high home-ownership often have a strong "not-in-my-backyard" ethos, with residents objecting to new development. Homeowners commute farther than renters, which causes congestion and makes getting to work more time-consuming and costly for everyone. He writes,

"In a free market, home ownership differs from its socially optimal level since there are two forces at work - one tends to make home ownership too high and the other tends to make it too low. First, congestion externalities act to make home ownership higher than socially optimal. Those commuting to work after a bad demand shock in their city ignore the externalities they create for other commuters. Second, assuming a missing insurance market in regional demand shocks, individuals in a world without government intervention will become renters too readily. This is a rational strategy individually, because, by renting rather than buying, a person invests in the ability to respond flexibly to a low regional demand for labour."


Update 1
The US Census Bureau found that as the home prices plunged, leaving people with negative equities, the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people. Labor mobility enables people to move in search of job opportunities, besides creating economic activity. Americans’ mobility rate, which has been declining for decades, fell to 11.9 percent in 2008, down from 13.2 percent the year before and setting a post-World War II record low. Moves between states dropped the most, to half the rate recorded at the beginning of this decade.

1 comment:

Toronto Realtor said...

Hello Gulzar,

These are all interesting numbers. Is there a change of you having similar data for Canada?

Also, do I understand right that according to your article and its sources, a wide-spread home ownership is damaging the economy rather then making it stronger? That's a bit of paradox, isn't it.

Elli