In a whopping 80-page report from Morgan Stanley this morning, analyst Richard Berner takes on America’s problems with unemployment head on, addressing both long-term and short-term solutions that could help get people back into work.
Many points were made, but one that stuck out was the subject of “labour immobility resulting from the housing bust.”
Essentially, since people are stuck in their homes for one reason or another, it’s becoming much harder for people to find work outside of their hometown since they can’t sell their house.
Morgan Stanley: America’s workers have always been footloose. Even in the Great Depression, they looked for work wherever it was. Today, however, about one in four homeowners is trapped in their house because they owe more than the house is worth, so they can’t move to take another job — until they sell or walk away. Unlike in the Depression, when homeownership was less prevalent, negative equity among a nation of homeowners leads to substantially lower mobility rates. That is leading to a wave of “strategic defaults” in which borrowers who can otherwise afford to pay decide to walk away. Whether through foreclosure or default, this process is undermining the economic and social fabric of communities and reducing job opportunities.
Long-term solutions: Financial and mortgage regulatory reform are essential to restore the health of housing finance. Significantly improving financial literacy is equally important.
Short-term remedies: Local efforts to stabilise communities plagued by foreclosure are essential, but they are not enough. It is essential to reduce debt, writing off bad loans while not destabilizing the financial system. Modifying existing mortgages seems appealing, but policies aimed at mitigating foreclosures under the Home Affordable Modification Program (HAMP) have not worked because they modify mortgage payments and not the amount of debt owed; re-default rates following modification are 50-60%. Efforts to establish a protocol for short sales and/or principal reduction should be a useful tool in avoiding costly foreclosure and strategic default.