Friday, April 15, 2011

Numbers lie - AKA Why Mike Konczal is wrong about housing lock

Mike Konczal of Rortybomb has a long post with many graphs that he feels prove housing lock is "not a major part of this crisis."

 He's wrong. Housing lock exists now; it is a problem; and it will continue to be a problem until people get their heads above water once again. Now how that will happen, I'm not sure at this point. But that millions of people are trapped in houses that cost less today than the value of their loan remains a big issue for many reasons. Though I am not an economist, nor do I have charts to display, I will explain some of the flaws of his argument.

 The first quote he uses to prove his point includes this statement: "Homeowners with extremely negative equity are especially mobile.” That's from a white paper by Sam Schulhofer-Wohl out of the Minneapolis Fed. If you check out the paper, it also says that 23% of mortgages in America are today underwater. (see footnote 1, page 1.)


The fact that nearly a quarter of all mortgages in America are underwater in and of itself shows our economy is in crisis mode. As the Schulhofer-Wohl paper notes, "negative equity was quite unusual until recently" (p. 4). That is it so prevalent today is an astonishing statistic.


Conversely, it is not at all astonishing that people with extremely negative equity are especially mobile. They have absolutely no skin in the game.


What Mike does not recognize is that the mobility of those who can easily abandon their house and mortgage is not relevant to the problem of housing lock. Severely underwater homeowners are not "invested" in the structure at all and according to the Schulhofer-Wohl white paper, they can and do walk away with exceptional mobility. They're not "locked" at all.

Their ability to walk away is relevant to their credit rating, something employers look at. Having a poor credit rating makes them less desirable as an employee, which can make it harder for them to find a job. 

The housing lock's real impact is on those who've invested money in their house, or who have the morality and ethics that leave them unwilling to walk away from a mortgage, or who recognize that the hit to their credit rating, should they walk away from their mortgage, could make them undesirable to employers seeking new hires. These people are locked into a bad deal and there is little they can do to get out of it without losing a lot of money. They have lost the ability to move to better opportunities. They've lost the ability to move at all. For them, the American Dream has become a terrible and paralyzing nightmare. Maybe Mike doesn't think so, but this is a significant issue, one that we've had little experience in dealing with prior to the crash.

Another issue ignored by Mike is the impact the loss of a home's value has on the family's net worth. For many in the middle class, their home is their biggest asset. We saw with banks, having toxic assets on the books is a recipe for disaster. Same holds true for families. That the home is now a toxic asset for many Americans poses a new problem for middle class homeowners to solve. And for those homeowners not underwater, the loss of value of their home means they've received a significant hit to their personal wealth.

For homeowners who now find their home to be a toxic asset, however, there is no hope of a federal bailout. Not only is there a financial negative to the drop in housing values, the disparity in how homeowners are treated today versus how bankers - who profited enormously by the boom - were treated after the crash (bailed out and bonused) has the potential to create huge political discord in a country already roiling in antagonism. 


Let's look at another source Mike uses to prove his point - another paper issued by the Minneapolis Fed titled: Interstate Migration Has Fallen Less than You Think: Consequences of Hot Deck Imputation in the Current Population Survey." This paper shows "that the significant drop in the annual interstate migration rate between the 2005 and 2006 Current Population Surveys is a statistical artifact," and concludes that "The 2007–2009 recession is not associated with any additional decrease in interstate migration relative to trend."

This paper apparently proves that removing a "statistical artifact" from another model shows there has been "no significant drop in interstate migration" in recent years "relative to trend."

As I noted, I am not an economist.  So first of all, how do I know that they're not offering up a "statistical artifact" of their own in this analysis? 

More importantly, so what if their statistics are right? What the paper does not indicate is where are people migrating to and from? Are they moving to a better job? To be closer to family? Or are they fleeing an underwater mortgage? How much does post-crash mobility cost compared to the cost of relocating prior to the crash? Did they take a bath on their home? Dip into the retirement fund to pay for the move? Numbers are meaningless without proper context.

A third paper quoted by Mike has this interesting nugget buried in a footnote (see footnote 16 on page 12):
"Based on the Panel Study of Income Dynamics, individuals are also more likely to have moved across state lines if they were unemployed or renters in the previous year. "
I don't know about you, but that tidbit makes it look like people who do not own a home are more likely to be mobile than home owners, which does not support Mike's primary thesis that "housing lock" is not a factor in mobility.

Now let's take a look at another analysis of the market: employee relocations. In that employment in America is a key metric for the economic recovery, mobility leading to employment is a key factor in determining if housing lock plays a significant role in the crisis.

Here's a report from Challenger, Gray & Christmas, an outplacement organization. What does an outplacement firm say about "job seeker relocation"? Take a look...
"HOME VALUES KEEP JOB SEEKERS NEAR HOME;
WORKER IMMOBILITY COULD SLOW RECOVERY

The percentage of unemployed managers and executives relocating for a new position fell to a record low in the third quarter of 2010, as a slightly improved job market and greatly depreciated home values combined to eliminate this option for most job seekers.
Just 6.9 percent of job seekers who found employment in the third quarter relocated for the new position. That was down from a relocation rate of 13.4 percent in the same quarter a year ago, according to the latest Challenger Job Market Index, a quarterly survey conducted by global outplacement consultancy Challenger, Gray & Christmas, Inc. among approximately 3,000 successful job seekers from a wide range of industries nationwide.

The relocation rate has been low for four consecutive quarters, averaging just 7.3 percent since the fourth quarter of 2009. The 6.9 percent figure in the quarter ending September 30 was the lowest ever recorded by the firm, which began its tracking in 1986.
'Continued weakness in the housing market is undoubtedly the biggest factor suppressing relocation. Job seekers who own a home – even if they are open to relocating for a new job – are basically stuck where they are if they are unable or unwilling to sell their homes without incurring a significant loss,' said John A. Challenger, chief executive officer of Challenger, Gray & Christmas."
According to this outplacement firm, an organization that studies more than the just the statistics of mobility, "greatly depreciated home values" are contributing to the diminished mobility of American homeowners.

This is echoed by Worldwide ERC, another organization that tracks workforce mobility. In a recent survey, they show the two top reasons employees decline relocation are "slowed real estate appreciation/depressed housing market at old location" and "old home is in a negative equity situation." Worldwide ERC's 2009 survey on workforce mobility showed a 16.6% decline in transfer volume from 2008. Some of that was do to hiring freezes within companies, due to the collapse of the economy. But seventy-two percent of employers in 2009 reported having at least "minor problems with employee reluctance to move," and more than 40% of employers reported "moderate to major problems with employee reluctance to move." As in 2010, "slowed real estate appreciation/depressed housing market at old location" was the top reason for employees to decline relocation.

According to this data, the housing lock has frozen many potential employees out of better job opportunities.

What does a moving company have to say about mobility? For many years, Atlas World Group has conducted a Corporate Relocation Survey. The 2010 survey found that more than half the employees of the companies surveyed declined relocation. Housing and mortgage concerns - at 77% - topped the list of reasons for the decline.

Those with "boots on the ground" - outplacement firms, relocation experts, moving companies - are not only seeing a workforce immobilized by the housing crisis, the housing lock has dangerously dried up their businesses since the crash.

And here's one more problem associated with housing lock, one that cannot be quantified neatly onto a chart - this from one of Mike's Minneapolis Fed references (see p. 12):
"Beyond the damage to households’ balance sheets, negative equity may be socially harmful if it reduces homeowners’ incentives to invest in their homes and communities..."
Housing lock limits the ability of workers to move for a better employment opportunity. The loss of mobility for homeowners creates a talent drain and potential financial loss for employers who find employees unwilling or unable to relocate, which may require employers to offer more costly incentives to get the right talent in the right place. Loss of the home's value negatively impacts the wealth of American families, particularly the middle class.

To have millions of families locked in homes worth less than the loan remains a serious issue in today's current economic crisis. Contrary to what Mike says, it is absolutely not a "small issue or perhaps even a plus." Numbers lie, unless they're given proper context. We may be "mobile" but it's not the "upward mobility" we've long associated with America. 

1 comment:

Main Street Muse said...

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Check back soon!