If a homeowner’s equity goes negative, will the homeowner feel stuck and unable to find better work? Or, will the homeowner search for new work elsewhere and take the loss? It’s an important question in New York bankruptcy because if the so-called “lock-in” effect is real, homeowners would probably be better off in the long run by trying to short-sell their homes, or discharging the mortgage deficiencies in chapter 7, and then moving on. On the other hand, if the lock-in effect isn’t real—that is, homeowners are stuck because there are no jobs anywhere—then selling the home by itself won’t help the debtor find new work. Although, the advantages of leaving the home might still outweigh the disadvantages.
An article published three years ago by the Federal Reserve Bank of Cleveland investigated whether the lock-in effect keeps people in underwater homes, and it discredited the phenomenon, finding that there weren’t any jobs for underwater homeowners to move to. Homeowners are willing to take a loss on their homes if good-paying jobs materialize elsewhere. However, a recent article published by the National Bureau of Economic Research (NBER) discovered the opposite: Job search concentration outside of homeowners’ commuting zones falls precipitously with home values, suggesting that the lock-in effect is real.
The authors of the NBER study analyzed 4 million applications to 60,000 jobs in the financial services sector between May 2008 and December 2009. They found that job seekers from communities that typically saw a 30 percent decline in home values were 15 percent less likely to apply to jobs outside their commuting zones. They also tended to apply to jobs within their commuting zones that either paid less or were at a lower skill level. On the other side, employers had a smaller national labor pool to hire from, but the local pool might have contained more overqualified workers willing to work for less. Ineluctably, the lock-in effect hampered homeowners’ long-term earnings.
As with the study on whether unemployment is a bigger cause of mortgage default than strategic default, it’s difficult to disentangle which situation causes which outcome. If debtors lose their jobs and then their homes’ values plummet, then it’s a very important to find out if there are jobs out there they can move to. If there aren’t any good jobs anywhere, then it’s understandable that homeowners would desperately try to find work locally to stay current on their mortgages.
The NBER paper is here.
Underwater homeowners rarely have good options, but arguably they’re better off resolving their housing problem before their job problem if the overall job market looks dire enough. If you owe more on your home than it’s worth, then talking with an experienced New York bankruptcy lawyer can help you gain flexibility in your living arrangements while reducing your housing costs.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.