How delayed foreclosures can actually lead to higher wages

Veer.com

The foreclosure crisis in the aftermath of the bursting of the U.S. housing bubble was incredibly damaging to millions of families. Due to the sheer number of mortgages in default, and the varied policy responses to slow down the rate of foreclosures, the average amount of time it took for a mortgage to go from initializing the foreclosure process to its completion rose from 9 months before the Great Recession of 2007-2009 to 15 months during and after the recession. While these borrowers faced the threat of losing their homes, they got a temporary reprieve from imminent eviction. A new paper argues that this delay in foreclosures had a significant effect on the labor market, which has implications for how we think about helping workers when they are unemployed.

The working paper, by economists Kyle Herkenhoff of the University of Minnesota and Lee Ohanian of the University of California-Los Angeles, attempts to better understand the relationship between the housing and labor markets. While others have looked at this topic, most of the prior work modeling the foreclosure process assumed that missing a payment on a mortgage immediately led to eviction. Clearly this doesn’t happen in reality. Herkenhoff and Ohanian model how a longer foreclosure process affects the behavior of workers, particularly those who are unemployed.

The two economists are working with a so-called search-and-matching model of the labor market, which focuses on the process of how workers and employers actually end up getting matched together in the form of a job. Using these models, the economists set up a relationship that determines how much unemployed workers search for a job. Herkenhoff and Ohanian analyze how much a workers’ job searching changes if foreclosure on their home were delayed.

Herkenhoff and Ohanian find that the searching declines when workers are in less dire need of a job to pay for their mortgage or pay for lodging elsewhere. The foreclosure delay acts like an implicit extension of credit from the mortgage holder to the borrower. This reduction in these workers’ search efforts also ends up having a significant impact on employment—the rate of employment for those with mortgages ends up being 0.75 percentage points lower in an economy where it takes 15 months to get to foreclosure, compared to one where it takes nine months.

This delay in finding a job affects the quality of the jobs that these unemployed workers end up with. As the unemployed workers are less desperate to take a job, they can take more time to find one that’s a better match for them. The end result is a higher average wage for the unemployed workers when there is a foreclosure delay. And that increase offsets the decline in employment so that total wages actually increases. Specifically, the total amount of wages in the economy goes up by 0.3 percent.

As the authors point out, these results are very similar to those found when studying the effect of extended unemployment insurance on the quality of jobs eventually taken by unemployed workers. In that case, credit gets extended to the unemployed worker (in the form of unemployment benefits) and the search intensity decreases, but average match quality and wages go up. Earlier research by Herkenhoff shows the general case of constrained credit has a significant impact on wages and job matching.

While the results from this paper shouldn’t be viewed as a specific endorsement of housing policy in regards to the labor market, it’s clear that extensions of credit to unemployed workers—be they implicit or explicit, or from private or public institutions—can help these workers come out of unemployment better off than if they were left to fend for themselves.