[Daniel Drezner]
Whenever economists of all political stripes compare the U.S. economy to Europe, one of the qualities that is presumed to give America an advantage is our flexible labor markets. Americans are more likely to move to places with better jobs than Europeans.
Which is why Louis Uchitelle's front-pager in today's New York Times is so worrying:
The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer. Or people seek... an escape from harsh northern winters.The problem isn't just the rapid decline in housing prices, however -- it's the uncertainty about the precise value of houses. Until the housing market bottoms out, potential homesellers will delay going through the Kübler-Ross stages of grief and internalize the loss of their house's value.Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people... are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.
Politicians will not help this process -- indeed, a lot of politics is about wallowing in the anger and bargaining phases. As Daniel Gross pointed out in Newsweek about six weeks ago, the various proposals for bailouts and foreclosure freezes accomplish nothing but delaying the proper functioning of the price mechanism:
In general, cleaning up quickly after popped bubbles is good for the economy, because it enables everybody to move on. Over the years the American economic system has proved to be quite adept at doing so. And as Japan's experience in recent years shows, refusing to deal with the overhang of bad debt can condemn an economy to a lengthy period of slow growth. But I doubt there's the political will to allow the fast price discovery allowed by foreclosures to continue. While it would certainly bring long-term economic benefits, the short-term social, financial, and political consequences of a rapid clearing of the housing mess are too much to bear. As the year goes on, expect presidential candidates and government officials to keep throwing lifelines and buckets full of hope at the housing market.Until people accept current valuations of their houses, they won't sell, which means an increasingly immobile labor force.
Two days before Megan returns!
How about a countdown clock on the site?
Or, more appropriately, a display of how the hits are dwindling with every hour she is away?
Does this labor immobility argument apply to academics who sit in cushy jobs where they can basically not be fired for anything short of a serious criminal offense?
And in the mean time, academics inflict on their students requirements to learn about literature that are, in many sub-disciplines, obsolete or just plain wrong.
What would happen to "higher" education if they were required to provide, a priori, a prospectus consisting of written, comprehensive statements of work / outcomes for their prospective students, and then back the document with a written guarantee?
Isn't it about time that "higher" education be held to the same standards as McDonald's or General Motors?
How about freeing this pool of immobile labor by abolishing tenure, bringing in Federally mandated quality standards (like No Child Left Behind), and extending the Magnuson-Moss Warranty Act to academe.
Yeah, the uncertainty over possible government plans to help out folks who are underwater on their mortgages is delaying the bottoming-out of the market, sludging up price discovery, crimping labor mobility, etc. Price discovery would occur faster if the government announced definitively that it was doing nothing to help homeowners who can't repay their mortgages. Then again, price discovery would occur faster if the government announced, definitively, that it was handing out exactly $50,000 to every homeowner who's underwater on their mortgage. Price discovery would happen faster, in fact, if the government would definitively announce ANY plan. It would happen just as quickly with a generous plan as with a stingy one, so long as the plan is definitive. But Drezner favors not giving any help to homeowners whose loans have gone sour, so he's arguing that the destination we need to be hurrying towards is his preferred one.
In fact, though, that's wrong, because the fact is that not everyone agrees with Drezner. And the politicians who don't agree with him will, so long as he and his ilk refuse to work towards a compromise, continue to hold out more generous offers, thus gumming up the works. If the goal is to get the mess settled rapidly, then what's needed is not for everyone to just agree with Daniel Drezner already. What's needed is for the Administration to exercise some goddamn leadership and put together a definitive plan that all sides can agree on. That's how the S+L mess was settled, and that's how we're going to have settle this mess too.
The Times is rather notable for its ability to find horrible new economic problems, especially under Republican administrations. This article isn't as good as the one some years back about the growing inability of families to afford their summer houses, leading to forced sales of same, but it's up there. Seriously, whatever problems the housing price decline brings, and there may be many, I highly doubt that a measurable decline in labor force moblity is going to be one of them. For one thing, the mobile part of the labor force isn't necessarily the part that owns houses that have declined in value.
I read this same article and came away thinking it was a load of BS. These people owe $125,000 on their house and want to sell it for enough to pay off their debt. They can either sit and wait and hope, or sell the house for what it's worth. They are in the early stages of denial about what has actually happened to the real estate market, particularly in the Detroit area. If all their home is worth is $90,000 they had better sell it for that and be done with it. Considering what is going on in Detroit right now it's likely their home will be worth even less than that in a few years.
For one thing, the mobile part of the labor force isn't necessarily the part that owns houses that have declined in value. - y81
Huh? Housing prices are down in every single metropolitan area in the US except for Charlotte, NC. Who are all these people whose houses haven't declined in value? But more importantly, your claim is tautological. Obviously the people whose houses have declined in value are less likely to be "the mobile part of the labor force", since they can't sell their homes and move to take new jobs. Which is, uh, the point of Uchitelle's article.
People have a right to sell their house for what they think it should sell for. If they can't get it on the free market, then the govnernment must buy it from them, or subsidize the sell.
Consider the folks who bought their homes five years ago, for instance. They should actually see a modest increase in value from 2003 to 2008, despite the "bust."
As to Dan's first point on comparative labor market mobility, lemme tell ya: Western Europe and the US are light years apart. I've lived in Germany for many years, and there, for all intents and purposes, you have to get state-recognized certification for any type of even semi-skilled job you can think of: To work as an office clerk or stock shelves in a grocery store as a full-time employee (part-time work is very limited in availability because employers have to pay for full-time statutory benefits) you take a six-month to three-year apprenticeship course and the state-recognized examination for the certification.
Plus, most companies cannot fire staff -- it's about like the above-mentioned tenure on US college campuses. If an employee in Germany simply stops working while at the office after the initial six-month probationary period, that employee can and will sue for a severance package on the basis of German employment law. And this is the situation in the private economy, not all the parts run by the state like the education and health sectors. In the latter, the government tells you where there is a job opening, and you either go there to your assigned post, or remain unemployed, or emigrate. To fire staff because of an economic downturn, the company practically has to be on the verge of insolvency.
I can't imagine the housing crisis resulting in European-style labor immobility.
they can't sell their homes and move to take new jobs.
Eh? Can't sell? I think you are quite mistaken. Houses do sell, just not at the prices homeowners want. The reality about a nationwide decline is that the seller might get, say, $50K less than the bubble price when moving, but then pays $50K less for a home in the new location. It is unclear to me how this is a National Tragedy, especially when young families can buy that first home for tens of thousands less as well.
No need for big government programs to solve this problem.
People with upside down loans are no problem.
Just have inflation at 100% for about 3 years, and all will be well.
No trouble fetching whatever price you want today on your house.
Eh? Can't sell? I think you are quite mistaken. Houses do sell, just not at the prices homeowners want.
If, like the guy in the NYT article, you owe $125,000 on your house, and the top price it will bring is $90,000, then, while you could sell it, you would have to be an imbecile to do so. You would make $35,000 more by simply defaulting on your loan.
I find the attitudes of the self-described "libertarians" on this blog to be increasingly hilarious: confronted with the facts of normal behavior by self-interested individuals in the free market leading to negative macroeconomic phenomena, they are resorting to blaming individuals for their behavior. "Why don't these silly people just sell their houses at a loss and take new jobs, so as to increase labor market fluidity for the greater good? Why do they persist in holding on to their houses, rather than selling them so that the market can clear and find its bottom?" Hmm...where have I seen macroeconomic problems blamed on individual behavior in the free market before? Oh yeah -- I think it was when Stalin blamed the famine in Ukraine on greedy kulaks refusing to sell their grain at below-market prices.
"Housing prices are down in every single metropolitan area in the US except for Charlotte, NC. Who are all these people whose houses haven't declined in value? "
I think y81 might have been talking about the people who don't actually own a house. Renters are part of the workforce, too, and are much more mobile than other homeowners. They really can pick up and move, incurring much less expense than homeowners.
What are the chances of getting a loan on a new house if you walk away from the loan on your old one? Someone changing jobs and moving to a new place has to live somewhere.
For those who aren't moving, and who can still make their loan payments, this whole thing can be temporary. They lost paper value, but their cost of living in the house hasn't changed. (Interest rates may have reset, but they knew that would happen.) The price of a house isn't going to fall to zero (except possibly in Detroit), and prices will probably start going up again once the market finds a bottom. There probably won't be an insane run-up again, but people who stay put should be fine.
And they say you shouldn't buy property if you don't plan to stay put for at least five years, anyway. At least they used to say that, and a lot of us still believe it.
I thought the Times story was overblown and that Drezner makes too much of uncertainty but that he is correct that dead-enders on holding out to see what Cheney will do for them. But corporate transfer generally involve some compensation from the employer -- even to the point of buying the current home -- so I don't see that as the huge issue here.
And I suspect that some reluctant home-sellers are hoping to score a double bank shot where they don't have to eat a big loss on the house they're selling but get the benefit of a low price on the new house they buy.
And like most posts and news articles on housing, this one is seriously devoid of key fundamental data, such as
1. what % of underwater mortgages are under water with respect to the original home price (i.e., what % involve refis and HELOCs where home-owners pulled equity out of the house)
2. what % of underwater mortgages involve cases where buyers made small down payments ( than median or average for the area
5. what % of underwater loans are for houses purchased in past 1, 2, 3, 4, 5 etc. years? The picture of the throwing the family out of the tradiational homestead doesn't compute with a family who moved up to a McMansion 2 years ago in the assumption that prices would continue to rise.
6. when are the Feds going to compensate me for the Enron stock I bougnt and was relying on to make the balloon payment on my mortgage? That sstock is now worthles because of Enron's criminal behavior and the government's lax ssupervision. Don't they owe me>
Response to Brooksfoe: You ask why they don't just default - as mentioned by others that would harm their future well being. Simply put, they are going to have to pay $35,000 as a part of their moving expenses. If they cannot afford that for one reason or another then what really happened is that they started a move (to Phoenix) that they couldn't actually afford to complete. They don't have to do it for the good of the economy, but for themselves. If their planned move to Phoenix isn't worth the $35,000 it will take to leave Detroit then they ought to stay there for as long as they feel the financial need to.
I'm suprised that no one has brought up the idea that maybe renting isn't so bad after all. The government is stupid. They encourage people to buy houses with the tax law, yet this makes mobility harder.
Back to the topic at hand, for banks, give no benefit to holding on to overpriced homes. In other words, don't "force" them to sell their inventories of foreclosed homes, but don't let them borrow using those homes as collateral either. That should encourage them to dump their inventories and drop prices faster.
Mostly what MarkG said. Renters, people who bought their homes more than five years ago, people in luxury apartments in NYC and a few other places, plus a few other categories--all of those people aren't hampered in their mobility by the current housing market. The first category, involving as it does most unmarried males, is an especially important component of labor mobility (who do you think shows up at construction sites after a hurricane?). In contrast, suburbanites with children are a lot less mobile to begin with, and those are the people most likely to locked in right now by underwater mortgages.
It's not just people who are underwater that are, if not screwed, seriously inconvenienced. My aunt and uncle want to retire and live closer to their grandson. They bought their house 20+ years ago, so it's mostly/totally paid off, but the market is so illiquid that nobody knows what either their current or prospective homes are worth.
Until the truly desperate start selling like mad and we learn exactly where the bottom is, there's no point in them selling or buying right now.
"Why don't these silly people just sell their houses at a loss and take new jobs, so as to increase labor market fluidity for the greater good?"
No one, other than you, is suggesting people take new jobs for the greater good. I'm suggesting people can sell homes, while you claimed otherwise, and I would suggest they do this only if it is in their self interest to do so. I'm simply pointing out that lower prices appear on both ends of the move.
And since you bring Stalin up, you are the one who advocates Stalinesque collectivist policies here. Haven't you learned anything from history?
I am curious to hear what Stalinesque collective policies I have advocated. I have no particular position on mortgage relief, though I do think that if billionaires get bailed out, then in the interests of preventing obscene injustice, normal people should be bailed out as well. But in any case, I seem to have buried any memory of Stalin's monstrous mortgage-relief plan of 1936, or whatever it is you are referring to.
"Simply put, they are going to have to pay $35,000 as a part of their moving expenses."
No they won't. Sure, the banks can try to sue the person for the remaining money in some states, but as I say you can't get blood from a turnip.
In the SD real estate market this is exactly what is happening. Any bailout will be solely for the banks benefit. The people who aren't bringing prices down are typically those who feel the despite their 150K house in 1997 now being worth 350K, it was at one point worth 500K and they just can't take that "loss"
"What are the chances of getting a loan on a new house if you walk away from the loan on your old one?"
Cry me a river, they may have a rent for a couple of years while they save up for a downpayment and repair their credit. Renting is just so horrible I don't know how anybody would cope with that.
In the interest of preventing obscene justice, one does not bail out all the imprudent parties- that is actually the most obscene result possible. The least obscene is to bail out none of them. In between are gradations of obscenity.
I am curious to hear what Stalinesque collective policies I have advocated.
Just check your post right under the one where I "self-described" myself as a libertarian.
Re: Considering what is going on in Detroit right now it's likely their home will be worth even less than that in a few years.
Detroit is an ugly mess, and the economy is bad all over Michigan. But don't confuse Detroit proper with its metro area. The city is far gone into decay, but while it's hard times in the suburbs too, they are not in anywhere near the state that Detroit itself is.
Re: Renters, people who bought their homes more than five years ago, people in luxury apartments in NYC and a few other places, plus a few other categories--all of those people aren't hampered in their mobility by the current housing market.
This is true too. The vast majority of homeowners (I am talking about people who live in their homes, not the flippers) are not underwater, because they bought several years back, at least, and can still realize a profit, assuming they are able to sell (the price is not the only problem these days; the credit crisis has dried up lending funds too). Of course some people may rent out their homes if they can't sell them (I have a friend from Michigan who did that, moving to North Carolina for a job) and some people who ae underwater may simply move away and let the house go into foreclosure. I know someone about to do that too.
Re: What are the chances of getting a loan on a new house if you walk away from the loan on your old one? Someone changing jobs and moving to a new place has to live somewhere.
A) They can rent. B) they can buy the new house before they nuke thier credit rating by defaulting of the old one.
Re: If their planned move to Phoenix isn't worth the $35,000 it will take to leave Detroit then they ought to stay there for as long as they feel the financial need to.
If it's the difference bewteen a job and no job, it will be worthwhile to take the financial hit. Moreover most banks will accept short sales (and the government recently changed the tax laws on this) if the alternative is outright foreclosure. Short sales in fact are becoming fairly common.
It seems like broadening home ownership is the cause of reduced labor mobility, not any change in house prices. Once people buy a home, they are more likely to stay there, or at least are forced to pay a higher cost to leave. This would be true in almost any price environment. If labor had to move to pursue opportunity, it seems that housing prices would almost always move higher in the place where the opportunity is, than where it isn't.
Perhaps, the current issue is that the current hosing market has reduced the liquidty (or effective liquidity) of homes, making selling them and moving more difficult. But that would still be a secondary issue.
I wouldn't lose any sleep about the long-term consequences on labor mobility. When people really have to sell, they will. Why, just the other day the NYT reported two astounding developments, home prices have dropped and home sales are up. Admittedly, the geniuses who write for the Times couldn't figure out the connection between those two developments, but most of the rest of us could.
It seems like broadening home ownership is the cause of reduced labor mobility, not any change in house prices. Once people buy a home, they are more likely to stay there, or at least are forced to pay a higher cost to leave. This would be true in almost any price environment.
It would seem pretty clearly to be the combination of the two. There would be no difference in price environments if 1. people were perfectly rational actors and 2. prices were not cyclical. However, people are irrationally averse to losses, as reams of data on economic behavior since the '70s has shown; and real estate prices are in fact cyclical, which means people during a downturn have a rational expectation that prices will rise in the future. Hence, if we look at three cases, one where people own homes and home prices have risen; another where everyone rents; and a third where people own homes and home prices have fallen, we would expect to see the lowest labor mobility in case 3.
JonF: "A) They can rent. B) they can buy the new house before they nuke thier credit rating by defaulting of the old one."
When you apply for a loan, you have to list all your existing debts. Leaving out your existing mortgage is fraud, and the new mortgage lender can easily see that you aren't going to be able to pay both mortgages and will refuse the loan. (One exception: if you've got substantial equity in the first house and a well-documented business plan for at least breaking even on renting one of the houses. I've an uncle who leveraged one purchase off the previous one until he owned a half-dozen rentals. But the bank does want to see that equity to ensure that they won't lose money if things go south and they have to repossess everything, so people who can do that aren't the ones with problems here, and I doubt anyone could do it with the current market uncertainties.)
As for renting, the issue is that most people can't rent and keep paying the original mortgage. (I'm planning to do just that, but it's a small mortgage, and my family will be staying there while I rent a room near my new job, in a rust-belt city where the rates have hardly kept up with inflation since I last lived there in 1976.) So, if they walk away from their mortgage and rent, they'll take a bath on that house and won't be making up the loss by picking up a new house at the market low.
I dunno - if you need to sell for a new job, you sell. At a loss or whatever. I did and it still worked out because the new job was better, the city was better, and prices are lower in the new place. Sorry I lost money on the old place but it sure as heck didn't stop me from pursuing a much better job opportunity. Of course, I didn't but more than I could afford the first time around.....if you need the job you move. What choice do you have? You think a house is gonna stop you?
Other points not addressed by commentators above:
1) a lot of banks still haven't got their tiny heads wrapped around the fact that it's better to have a short sale and at least get something back, rather than forcing the individuals into foreclosure.
2) if people are upside-down on their houses by a large amount in a non-recourse state, it is more efficient for them to simply practice jingle-mail and walk away.
3) Once you've bailed out Bear Stearns, you don't really have that much moral authority to stand on when you start squawking about "no handouts from the government!" Yeah, from an economist's point of view it is probably cheaper to bail out Bear Stearns now and keep the whole system afloat rather than let the whole system go down, but try stating that and not looking like you're just spinning economic hooey-talk to to cover a bail-out of your fat-cat investment banking friends--won't work.