And now it turns out that the current crisis might also undermine the efficient redeployment of human resources. A well-timed recent study by economists Fernando Ferreira, Joseph Gyourko, and Joseph Tracy finds that homeowners who have "negative equity" in their homes—that is, a mortgage that exceeds its resale value—are 50 percent less likely to move than those who can afford to pay off their mortgages with a home sale. Given where the housing market is headed, millions of workers may be locked in place in the years to come, throwing yet more sand into the gears of America's market economy. A great job opportunity in Charlotte, N.C., isn't worth much to you if you can't (or won't) sell your house in Tampa, Fla.

There are both financial and psychological explanations for why having an outsized mortgage on a relatively modest home reduces mobility. First, if you owe more on your house than you'll earn by selling it, you may not have the cash on hand to close the deal, let alone put a down payment on a new home. Higher interest rates will have a similar effect, pushing the cost of a new mortgage out of a potential homebuyer's reach. And if your mortgage is "underwater," odds are you'd be selling your home at a loss, a psychologically painful prospect to contemplate (what behavioral economists appropriately refer to as loss aversion). Rather than absorb that loss, people who bought at the market's peak tend to set high asking prices and, as a result, are forced to sit much longer on unsold homes or hold off on selling entirely, clinging to the hope that real-estate markets will recover.

Of course, these factors can be offset by the forced relocation that comes with default and foreclosure—when an owner is unable or unwilling to continue making mortgage payments, whether to move is no longer a matter of choice. complete story

Source: Slate.com - Ray Fishman

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