Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States

Abstract

This paper exploits the significant recent variation in U.S. house prices to empirically examine the effect on housing equity constraints and nominal loss aversion on household mobility. The analysis uses unique, detailed data from 1985-1996 on household characteristics, mobility, and wealth from the National Longitudinal Survey of Youth (NLSY79) matched with house price data from 149 metropolitan areas to estimate semi-parametric proportional hazard models of intra- and inter-metropolitan mobility. There are five principal findings. First, household intra-metropolitan own-to-own mobility responds differently to nominal housing losses than to gains. Second, nominal loss aversion is significantly less pronounced in intra-metropolitan own-to-rent and inter-metropolitan mobility, respectively. Third, there is some evidence of binding equity constraints in intra-metropolitan own-to-own mobility. Fourth, there is little evidence that low equity constrains intra-metropolitan own-to-rent and inter-metropolitan mobility, respectively. Fifth, a comparison of the estimated effects indicates that nominal loss aversion has a more dominant effect than equity constraints in restricting household mobility: roughly two-and-a-half to three times the impact of equity constraints.

JEL Classification: H31