The 2005-11 Housing Boom and Bust: Impacts on Housing Turnover and Implications for the Recovery

The recent unprecedented house price boom and Great Recession have had unusual and unusually large effects on housing turnover. Nominal house prices plummeted and unemployment surged, causing housing turnover to plunge. Subsequently, intervention by the Federal Reserve lowered mortgage rates to historic levels, which unlocked households with below-market interest rates. House prices have begun to recover and further increases are anticipated, but so is a reversal of the Federal Reserve's low interest rate policy. The former will unlock households with negative equity, while the latter will lock in households with nonassumable fixed rate mortgages. The net effect on housing turnover is uncertain. This paper presents an econometric model of the determinants of housing turnover for Chicago, Illinois. We use a unique database for 33 submarkets (PUMAs) of Cook County collected by the DePaul Institute for Housing Studies to measure the mortgage position of homeowners. We combine these mortgage data with PUMA data on demographic and economic variables and estimate a housing turnover relationship. This relationship is then used to simulate how the economic recovery -- increases in house prices and mortgage rates -- will affect housing turnover. The results are generalized to twelve US metropolitan areas that have homeowner equity positions similar to regions in Cook County in late 2012.