Millions Of Americans Are Permanently Trapped In Their Underwater Homes

    JP Morgan is out with a piece which asks the question: why has the unemployment rate not declined despite the recent uptick in job openings? The problem is that a large number of Americans are permanently trapped in their underwater mortgages and cannot move locations to take advantage of job positions. With 25% of households underwater, millions of Americans are affected by this phenomenon.  The real question is why these people don't just default on their mortgages. It makes economic sense even if you take a hit to your credit score and lose your down payment in order to secure better employment opportunities elsewhere. Perhaps all of the government relief programs give hope to some that they will be able to get the principal reduced (not likely because the banks would be against it). Another reason is that some companies run credit checks on new employees. So if a prospective employee defaults on his/her mortgage, then they may not get the new job they were promised. However, not all companies run credit checks so this is probably a small factor. I think the main reason is that most Americans have been brainwashed into believing that home prices always go up and that prices will eventually recover. That may be true but it could take another 3-5 years for home prices to stabilize and then tread water. Getting back to the peak back in 2006 could take 10 years or more (likely more), which makes walking away the better option for most homeowners who are underwater. Otherwise they are permanent debt slaves to the bank.      

From JP Morgan:

Historically, a rise in the number of job openings has been accompanied by a fall in the unemployment rate as workers begin to fill the increasing number of available positions.

However, with house prices failing to recover any meaningful amount of their 32% peak-to-trough decline, the high (roughly 25%) proportion of households still in negative equity (i.e. owing more on their mortgage than the value of the house itself) represents a major constraint on labor mobility; underwater jobseekers are unable to sell up and move to other parts of the country to accept employment without taking a significant loss on their home value. Consequently, job openings are rising without a concurrent drop in the unemployment rate. Further downward pressure on house prices would only exacerbate this problem.
Despite Chairman Bernanke's non-committal language at last week's Jackson Hole central bankers' summit, this reinforces our view that the Fed will have to initiate another round of asset purchases before long to encourage Treasury and mortgage rates lower. But while lower borrowing costs may prove a marginal support for the economy, particularly by boosting discretionary income for homeowners who refinance their existing mortgages, more quantitative easing is unlikely to reverse the fundamental demand-supply imbalance in any short order. There is an old British saying that something highly secure or certain is 'safe as houses'. Paradoxically, housing looks increasingly like the U.S. economy's weakest link.



  1. I agree--Why dont these people just walk away? It is the logical thing to do, especially if they can get a job somewhere else.

    1. Be thankful that the waters not real that would be worse.