Thursday, April 15, 2010

Headwinds to Labor Market Recovery Part IV: Housing Markets

In the first three posts of our unemployment series, we noted how slower job creation, shortened work weeks, and increased permanent layoffs were a drag on the labor market recovery. In this post, we’ll explore the impact that the housing markets are having on the recovery.

If a worker becomes unemployed, one option for employment is to relocate to an area where there is demand for those skills. However, many local housing markets are prohibiting this move, because the borrower is "underwater" and owes more than the home is worth. A good example of this is the state of Nevada. Nevada has a 13.2% unemployment rate. Seventy percent of mortgages in Nevada were underwater in the fourth quarter of 2009.

States suffering from severe unemployment – California, Nevada, and Florida – also have the highest shares of “underwater” mortgages, exacerbating difficulties for unemployed workers.

A relationship between underwater borrowers and unemployment rate is evident, as four of six states with the highest unemployment rates as of February 2010 also had the highest underwater rate as of December 2009. Two states with the lowest unemployment rates – Oklahoma and North Dakota – also had some of the lowest underwater rates.

In fact, 26% of the variance in a state’s unemployment rate can be explained by variance in a state’s percent of mortgages that are underwater.

Further, many people under financial strain have sought relief through mortgage modifications, which in some cases require the borrower to stay in the home for up to 5 years. These disruptions to worker mobility are already having an impact, as the share of people living in a different county or state compared to the previous year recently hit its lowest level in more than 50 years of data.

Other posts in the series Headwinds to Labor Market Recovery
Part I: Slower Job Creation
Part II: Excessive Slack in Work Week
Part III: Permanent Layoffs

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