Chris Cunningham and Robert R. Reed
Working Paper 2012-20
December 2012

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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.

JEL classification: D10, J30, R20

Key words: negative equity, wages, mortgage default

The authors gratefully acknowledge the generosity of Fernando Ferreira, Joseph Gyourko, and Joseph Tracy in sharing the code from their (2010) paper as well as excellent research support provided by Ellyn Terry. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Chris Cunningham, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8977,, or Robert Reed, Department of Economics, Finance, and Legal Studies, University of Alabama, Tuscaloosa, AL 35487, 205-348-8667,

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