Housing Wealth and Wage Bargaining

28 Pages Posted: 22 Mar 2015

See all articles by Chris Cunningham

Chris Cunningham

Federal Reserve Bank of Atlanta

Robert R. Reed

University of Alabama

Date Written: December 2012

Abstract

We examine the relationship between housing equity and wage earnings. We first provide a simple model of wage bargaining where failure leads to both job loss and mortgage default. Moreover, foreclosure generates disutility beyond selling a home. We test this prediction using nine waves of the national American Housing Survey. Employing a rich set of time and place controls, individual fixed effects, and an instrumental variable strategy, we find that people with an underwater mortgage command a significantly lower wage than other homeowners. This finding survives a number of robustness checks. We also include other determinants of "house lock" such as a favorable mortgage interest rate relative to the current rate and a capped property tax assessment, but we do not find these factors lower earnings. We conclude that negative equity matters because default is unpleasant or costly, not because it precludes an out-of-state job search.

Keywords: negative equity, wages, mortgage default

JEL Classification: D10, J30, R20

Suggested Citation

Cunningham, Chris and Reed, Robert R., Housing Wealth and Wage Bargaining (December 2012). FRB Atlanta Working Paper No. 2012-20, Available at SSRN: https://ssrn.com/abstract=2479424 or http://dx.doi.org/10.2139/ssrn.2479424

Chris Cunningham (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Robert R. Reed

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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