Is It a Terrible Time to Move?

Americans are incredibly mobile, but dropping home prices will trap many in their homes, unable to pick up for a better job.

This week's latest real estate data show—surprise!—housing prices continue to fall across the US. There are various unpleasant side effects of declining house prices, at least one of which doesn't get the attention it deserves. Granted, none of the things that happen in falling housing markets are pleasant—unless you're looking to buy a house, and even that is tough given the relative difficulty of obtaining a mortgage—but simply being unwanted doesn't make them go away.

First, a declining house price makes you poorer. That's no fun, especially because being poorer—a negative wealth effect, in deliriously opaque econo-jargon—will generally lead to you spending less, and Americans are nothing if not indefatigable spenders. (Whether that is a good idea, or whether it should even be a goal in the future, are different questions.)

Should we care? Absolutely. By way of context, about 12 percent of US homeowners move in a typical two-year period.

Second, a declining house price can lead to you owing more on your house than it is worth. The term of art for that situation is being "upside-down" on the mortgage, which makes it sound more like a tai chi position than the sad state of financial affairs it is. Generally speaking, people who owe more on their mortgage than the house (or apartment or condo) is worth don't stay that way for long. They walk away from it. After all, why keep making payments on a property that has to gain in value just to get you back to the point where you'd make no money from unloading it?

The third thing that can happen is rarely mentioned. The mobile American labor market breaks down when housing prices fall. Why? Because people will likely move less frequently, if at all. Tearing yourself away from a house when you know you are going to lose money on the sale (assuming you can sell it) is no easier than selling a stock when it is down, and there are plenty of reasons to think it's harder. What does the evidence show? According to some new research, using data from 1985-2005, money-losing homeowners were 50 percent less likely to move than was otherwise the case.

Should we care? Absolutely. By way of context, about 12 percent of US homeowners move in a typical two-year period, making Americans among the most mobile citizens of any developed economy in the world. People move for a host of reasons, but most common among them are economically driven factors, like a new or better job. Economists generally approve of that sort of thing, as it often leads to higher wages through better matches in the job market—you obtain a job more closely fitting your skills and experience, so you are paid more.

Less mobility means worse matches in the labor market—the best person for the job isn't always hired; people earn less overall—and that represents a kind of tax in the economy.