Being Underwater on Your Mortgage Reduces Your Earnings

Why has wage growth been anemic in the current U.S. economic recovery, despite strong productivity gains? One reason may be that many homeowners have owed their banks more than their homes are worth, and being underwater on a mortgage depresses earnings, say Chris Cunningham of the Federal Reserve Bank of Atlanta and Robert R. Reed of the University of Alabama. Specifically, having mortgage debt that exceeds the home price lowers one’s current earnings by 3.7%, apparently because underwater homeowners accept lower wages to avoid job loss, which could lead to mortgage default.

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