This article examines the Federal Reserve Bank of Chicago’s report that job growth is not being staggered by ’house lock’ and analyzes the factors actually contributing to California’s lack of job growth.

Underwater homes are not to blame

The theory that a negative equity home keeps the unemployed homeowner from relocating and finding a job has proven moot, according to a paper published by the Federal Reserve Bank of Chicago (Chicago Fed). Since the Great Recession, economists ― and first tuesday ― have asserted people are unable to migrate to cities with better job prospects because they can’t sell their homes. [See the Federal Reserve Bank of Chicago’s paper, How much has house lock affected labor mobility and the unemployment rate?]

While the hypothesis that an underwater home restricts homeowner mobility seems logical, we are happy to concede the numbers just don’t back it up.

Researchers made their conclusions after comparing the state-to-state migration of homeowners to renters. If homeowners were being held back because they couldn’t sell their homes, the rate of homeowner migration would be significantly lower than the rate of renter migration.

There remains little difference between the migration patterns of homeowners and renters.

However, there remains little difference between the patterns of homeowners and renters. Both pools seem to be continuing their migrations at the same pace. Additionally, states with particularly high job losses and unemployment recorded no significant reduction in emigration.

The true culprits


The pure lack of business and government demand for employees in the current economic climate is more to blame for a homeowner’s inability to sell or find a job. In this vicious cycle, those without jobs have no excess income to spend which decreases consumer demand and the need for businesses to hire more employees. Likewise, the unemployed contribute to this house lock by either:

  • delaying homeownership and decreasing housing demand or;
  • defaulting on their mortgage and putting even more homes on the market.

As for the negative equity homeowners, they seemed to have figured out they can sell their home to their lender and move by simply exercising their legal right to default. [For more information regarding strategic default, see the July 2011 first tuesday article, Strategic default smarts and the May 2011 first tuesday article, Short sale or foreclosure? The naked truth for underwater homeowners.]

Consumer confidence is too low at the moment to accommodate our California population with job growth or increased demand for homeownership. It will not increase until the government stimulates job growth and forces lenders to clear out their shadow inventory of foreclosures. Once the confidence level trends upward, home sales will follow.

Californians can expect sustainable job growth starting in 2012, then a less than exciting rise into 2016 when we will have recovered all job losses since our employment peak in December 2007. [For more information regarding California employment, see the June 2011 first tuesday article, Jobs move real estate.]

To weather the storm, agents must get creative

Homeowners who purchased during the Millennium Boom are still in denial about the diminished value of their homes and have a tendency to overprice with fond memories of the past. This sticky pricing syndrome is a major problem for sellers who wish they didn’t have to sell ― a problem listings agents must aggressively address. [For more information regarding sticky pricing, see the July 2011 first tuesday article, Budging from sticky pricing (or not).]

Marketing advice:  If a home seller intends to buy later, the seller’s agent needs to determine what they want in a replacement home. If they wish to remain in the local market, consider an exchange of homes (read: equities). To facilitate an exchange, the purchase agreement to buy the replacement home merely states the down payment on it is the dollar amount of the equity in the home the buyer no longer wants. Also, broker and builder trade-in programs should be surfacing in this market to help generate transactions among homeowners who want to move. Think outside the multiple listing service (MLS) box.

Marketing advice: think outside the MLS box.

It is of particular importance that MLS brokers and agents note the results of this study. According to the Chicago Fed report, if a homeowner is able to sell his home it is more than likely he will be looking to buy or rent in the same region. This is especially true in California.

Unlike the recession of the early 1990s, we are experiencing little exodus in California, with the population currently expanding at over 400,000 annually. Seller’s agents can offer to locate a replacement residence for these homeowners to buy or rent long-term, which often results in another transaction and another fee. [For more information on the trends in California’s population numbers, see the July 2011 first tuesday article, Golden state population trends.]