Written with Shamim Adam
People who are underwater on their home mortgages probably will accept “significantly” lower wages than other homeowners, according to a study published this month by the Federal Reserve Bank of Atlanta.
The recent U.S. housing bust left many homeowners with mortgage debt larger than the equity value of their homes, say Fed Bank of Atlanta economist Chris Cunningham and Robert R. Reed of the University of Alabama.
They cite data showing that 31.4 percent of U.S. homeowners were underwater in the fourth quarter of 2011. People in that situation tend to value employment more than those with significant housing wealth do, because without a job they would default on their home loan, Cunningham and Reed said. They thus are willing to accept lower wages than their counterparts.
Their study found that being underwater is associated with a wage decline of between a 5 percent and 9 percent.
The risk is that by agreeing to work for lower wages, underwater workers create a negative feedback loop in which “house price depreciation leads to lower wages, and in turn, lower wages lead to greater housing losses,” they said.
From the Bloomberg News Cutting Research column.