Rising home prices are good for owners, bad for job movement

by Kimberly Greene12 Jul 2019

Increasing home prices have played a strong role in the decreased movement both to and from desirable locales, according to a recent working paper from the International Monetary Fund. This movement is most closely associated with long-distance moves related to job opportunities.

We tend to think that technology is facilitating a more mobile workforce, but data from the Current Population Survey reports that interstate migration of America’s working population actually halved from 1980 and 2016, and that drop in migration has been most marked out of poorer areas.

“For those migrating uphill, from a less to a more prosperous location, lower mobility is driven by increasing house price inequality, as the disincentives from higher house prices dominate the incentives from higher earnings,” the IMF report said.

When it comes to movement out of prosperous locales, the driving factor behind the fall of those moves is increasing income inequality; the disincentives from lower earnings dominate the incentives from lower house prices. This not only makes recovery from economic downturns slower, but it also means that people become trapped in those poorer areas, unable to capitalize on either improved employment possibilities or more affordable living and thus, the cycle of geographic and economic inequality continues.

The authors of the report, Tamim Bayoumi and Jelle Barkema, said that some solutions exist to combat the inequality and restricted movement due to rising income and house price inequality. These solutions require the participation of both local and regional bodies, and would involve targeted support as opposed to broader initiatives.

One approach requires policies that “modernize land-use regulations, reduce bureaucratic delays, and lower economic and racial segregation (which would allow housing supply to respond to better demand) and improve transportation and public transit (which would widen the catchment areas for prosperous metro areas),” the authors wrote.

The fall in migration is directly linked to rising income and house price inequality. People in economically depressed areas want to move to areas where jobs are better and where there are more prospects, but those areas are also where housing is much less affordable. And, unlike those people moving from poorer to richer metro areas, there is really no incentive to encourage the flow of people into more affordable areas.

Previous research cited the rise in homeownership as a primary factor in the decline of migration, since homeownership increases the overall cost of moving. Since migration has fallen for both homeowners and renters, however, the rise of homeownership rates cannot account for the entire drop in migration. Other research has suggested that the collapse of the housing market during the boom and subsequent recession might help to explain the fall in job mobility, but the authors note that this is probably not the case, as the trend originated in the 80s—well before the financial crisis—and has not recovered the way the housing market has.

The increasing differences in returns to house prices is discouraging migration to prosperous areas even as widening differences in returns to wages is reducing migration in the opposite direction.

“The discouragement to moving from a poor to a rich metro area coming from wider divergences in house prices has outpaced the positive impacts to migration from greater differences in incomes,” the report said. “Prices are moving, not people.”

Land shortage is a factor, especially in “superstar cities.” Because of this, house prices have risen compared to incomes, and the report indicates that the ratio of the logarithm of median house prices to median incomes has increased by 39%, as people who have a high future earnings potential have rushed to move into successful metro areas and played a part in their gentrification.

There is a significant asymmetry in response to house price and income differentials, which can partially be explained due to the fact that home price differences have been accompanied by a decrease in housing affordability in many places, rising income inequality, and the increased concentration of both skilled and unskilled workers across metro areas. It is becoming more and more difficult for people living in areas with low house prices to be able to afford to move to successful ones—and because the differences in house prices is linked to rising concentrations of skilled workers, home owners who are currently living in areas with high home prices are not only hesitant to relocate to more affordable areas, in part because those areas also have a much lower likelihood of significant appreciation of home values.

Once a homebuyer gets into an area with high home prices, they’re more likely to stay put for fear that they won’t be able to afford their way back into the market if they ever return. (This also reduces inventory for those would-be movers to more well-off areas.)

Although the findings aren’t particularly surprising, the authors end with a warning.

“Unless policy action is taken, the gradual erosion in the flexibility, and hence the competitiveness and prosperity, of the United States economy will likely continue, with its attendant economic and social strains,” the report said.