Why the Low-Churn Housing Market Is Bad for Workers
When workers can't move, they can't switch jobs. Julius Probst, PhD explains how housing gridlock is creating additional friction in the U.S. labor market.
Photo credit: Marcus Lenk
If you have followed our content on Recruitonomics for a while, you have probably heard about the low-churn job market. American workers have seen a declining number of job opportunities in recent years due to the “low-hire, low-fire” economy. The total number of annual hires fell from a peak of more than 79 million in 2022 to less than 63 million recently.
But the labor market is not the only important part of the U.S. economy that is frozen. Residential real estate has seen a similar decline in churn. In this piece, I will suggest that the two phenomena are related and, in fact, reinforce each other: the static housing market is feeding back into the labor market, creating even more friction for workers. This has implications for the dynamism of the U.S. economy and long-run growth.
Housing transactions have plummeted
Sales data from Redfin suggests that the U.S. housing market is currently in crisis mode. Following a brief frenzy during the pandemic, when real estate benefited from cheap credit, the number of housing transactions fell sharply after the rise in inflation and surging mortgage rates in 2022. Since then, sales have hovered under 300,000 per month, significantly below pre-pandemic levels — the last time the housing market was this depressed was in 2013.
High mortgage rates are creating a lock-in effect
One obvious reason for the sluggishness of the housing market is high mortgage rates. Even as house prices have remained surprisingly robust, sales have plummeted. The reason: the post-pandemic inflation shock has led to a doubling of mortgage rates, from a little over 3% in 2020 to about 6.5% more recently. Due to that surge, homeownership is increasingly out of reach for many households because mortgage payments have ballooned.
Since many homeowners benefit from lower interest rates they locked in before or during the pandemic, the economics of moving have become highly unattractive: going from 3% mortgage to almost 7% can double the monthly payment for a similarly priced home.
Geographic mobility has been declining for decades
While today’s housing unaffordability is certainly a factor, geographic mobility within the U.S. has been on a downward trend for decades. The Census Bureau has tracked the movement of Americans since 1948. While in the 1950s about 20% of Americans moved each year, that number has more than halved to under 8% in 2023.
What’s interesting is that most moves happen over short distances. Historically, only a little more than 3% of moves are across county or state lines — both of which have also halved in recent decades and are now standing at 1.8% and 1.4%, respectively.
Blame the aging population and housing unaffordability
Two important factors help explain the general decline in geographic mobility within the U.S. First, the aging population. Older workers and retirees are more settled and move less often than younger workers. Second, housing unaffordability plays an important role. In the 1970s, median home prices were about three times median household income. Since the early 2000s, they have been closer to five times median household income. This shift, combined with the massive surge in interest rates since the pandemic, has sparked a nationwide housing affordability crisis.
There is ample evidence that this has hindered geographic mobility. While California has some of the highest-productivity regions in the U.S., the state is experiencing migration outflows, largely because housing has become way too expensive. This is highly problematic from a labor market perspective, as workers should be encouraged to move to areas with higher productivity.
Regional construction hotspots offer pockets of affordability
The good news is that some regions within the U.S. continue to be more affordable than others. Several Sunbelt states, such as Texas, Arizona, and Utah, have been building housing at a much faster pace than California or the Northeast.
As a result, median home prices in the South have underperformed inflation over the past four years, with Texas and Arizona even recording outright declines. Although the national labor market has remained relatively static, some regions have managed to attract a steady inflow of workers as local construction booms have helped keep a lid on prices.
What’s the labor market connection?
Greater housing competition between states is certainly a good thing. The Sunbelt has exhibited stronger-than-average economic performance as workers have flocked to areas with more affordable housing and better job opportunities. Nevertheless, overall mobility has declined in the long run because other regions have failed to adopt a similar pro-growth approach. More states would need to embrace pro-housing policies for nationwide mobility to pick up.
The static housing market is bad news for workers because it restricts access to better job opportunities. It doesn't always make sense to relocate for a higher-paying role in California, for example, if disposable income is lower after accounting for housing costs — be it rent or mortgage payments. The mortgage lock-in effect can make moving for a better job a loss-making proposition. All of this means that the low-churn housing market feeds into the low-churn labor market and vice versa.
What does this mean for recruiters?
Housing unaffordability has risen in recent years, creating a static housing market with fewer transactions. Not only is this bad news for workers, but it is also bad from a hiring perspective because it restricts the talent pool that companies can draw on. A dysfunctional housing market makes it harder for recruiters to attract workers from other counties or states. While other factors, such as population aging, are also at play, housing unaffordability has certainly contributed to the decline in geographic mobility within the U.S. Some of the highest-productivity regions — particularly in New England — are not attracting as many workers as they should. In the case of California, the state is even actively losing them. The housing boom in parts of the Sunbelt, on the other hand, has gone hand in hand with an office construction boom in cities like Austin, Houston, and Denver. This makes sense. Companies are shifting part of their activity into the more dynamic regions of the country where the talent pool is expanding.