A new study suggests buyer psychology and tighter credit aren’t the only factors keeping would-be home buyers on the fence — homeowners with negative equity are often "locked in" to their existing homes and are nearly 50 percent less likely to move in order to take a new job, cut their commute time or move to a neighborhood with better schools.
The study, Housing Busts and Household Mobility, found that while becoming "upside down" forces many homeowners to move from their homes because of foreclosure, an even greater number have historically ended up stuck in their homes.
That’s because until housing prices rebound, a sale of their existing home won’t pay off their existing mortgage — let alone generate the proceeds needed for a down payment on their next home.
The study’s authors — housing experts at the University of Pennsylvania Wharton School of Business and the Federal Reserve Bank of New York — warned that the repercussions of "lock in" include less efficient job markets and reduced incentives for homeowners to keep up and make improvements to their homes.
Some families will not be able to move to access better jobs in alternative labor markets, the study concluded, while others who would like to move to access better schools or a different-size home will be unable to do so, the study said.
The study looked at two decades of housing data, covering the period from 1985 to 2005, and found that negative equity reduces homeowner mobility more than previously believed. All in all, having negative equity reduced the percentage of homeowners moving within a two-year period by 5.6 percentage points, a reduction of 47 percent from the baseline mobility rate of 12 percent.
"That the net impact of negative equity … has been to reduce, not raise, mobility may surprise some given the high number of defaults and foreclosures in the current environment," the study noted.
The study looked at a period when subprime lending was not nearly as prevalent, and included only owner-occupied homes — not those purchased as investments or second homes. Only time will tell whether the number of people locked into their homes during the current downturn outnumbers those forced to move because of foreclosure, the authors concede.
Even if the study’s analysis of the past can’t simply be extrapolated into the future, "policymakers should begin to consider the consequences of lock-in and reduced household mobility because they are quite different from those associated with default and higher mobility," the authors said.
More research is "urgently needed" on issues surrounding the "financial frictions" associated with potential mortgage lock-in, the study said.
According to Worldwide ERC — formerly the Employee Relocation Council — about 794,000 households relocate a year because they are transferred to a new job within the U.S. About 54 percent are homeowners, while the rest are renters.
Worldwide ERC reports that most companies offer to purchase at least some employees’ homes if they can’t sell, while 20 percent reimburse employees’ selling expenses. The group, which represents organizations that manage relocation programs, estimates $32 billion a year is spent on U.S. corporate relocations.
The new study provided an overview of past research demonstrating that falling home prices or rising interest rates can lock borrowers into their homes. Households without access to enough cash or credit may find their options constrained even if home equity does not turn negative.
Another factor that can trigger the "lock-in effect" is the original loan-to-value (LTV) ratio. The smaller the down payment provided by the home purchaser, the more quickly they end up "upside down" in the event of price declines.
The study noted that in the San Francisco Bay Area, LTV ratios were typically around 80 percent until the end of 2002, and then increased sharply to 90 percent in 2004.
"Essentially, the typical new home buyer in the Bay Area bought a house for $800,000 in 2006 using a $720,000 mortgage," the study concluded. "If prices really do decline by 25 percent from their peak, the underlying house value will be around $600,000, which is much lower than the typical mortgage balance taken out that year."
In the late 1990s, barely 10 percent of Bay Area borrowers had LTVs above 95 percent. By 2006, about 35 percent of buyers had LTVs exceeding 95 percent, and more than half exceeded 85 percent.
The study’s authors — Fernando Ferreira, Joseph Gyourko and Joseph Tracy — also shed light on how demographics affect mobility. While being married does not affect mobility, divorce does make homeowners more likely to move.
So does race, sex and education. Households headed by a person with some college have two-year mobility rates that are 4.2 percentage points higher than those without a high school degree. Whites are more likely to move than non-whites, and female-headed households are more likely to move than those headed by males, the study found.
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