The wrong kind of falling homeownership
Richard Florida has long been in the same camp as me on the homeownership front: it’s too high, and creates problems like labor immobility and rental ghettoes populated only by people who can’t afford to buy. Today he says that we’ve already had a “great homeownership reset”, based on a paper by Andrew Haughwout, Richard Peach, and Joseph Tracy of the NY Fed. Take into account all the people who are underwater, on their mortgages, he says, and you’ll find that “US homeownership is already lower than you think” — just 61.6%.
But the problem is that this is exactly the kind of reduction in homeownership that we don’t want. Homeownership isn’t all bad: there are upsides to it, as the authors of the paper explain.
Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.”
It’s possible to argue for hours about just how big these upsides are, and whether or not they outweigh the downsides of homeownership. But it’s undeniable that when homeowners go underwater on their mortgages, a lot of these upsides disappear: you’re not going to invest in your house if the return on that investment accrues to your lender rather than yourself.
At the same time, the downside of homeownership hardly goes away the minute you go underwater on your mortgage — to the contrary, it’s exacerbated. The serious problems associated with those crumbling exurbs get much worse with each extra underwater homeowner: now, alongside the rental ghettoes, we have to deal with foreclosure ghettoes as well. If you’re living in a home with negative equity, then you have all the downside of renting, (not being willing to invest in your house, for instance) alongside all the downside of owning (like not being able to easily move to where jobs are).
Tracy Alloway, blogging the Fed report, explains why homeownership is very likely to fall over the next five years: those underwater homeowners would have to save an extra $1,222 a month, on average, if they’re going to close out their existing negative equity and buy a new home in five years’ time. And that’s not going to happen. As a result, we face essentially two choices: either the misery of America’s millions of underwater homeowners is likely to continue for the foreseeable future, or else the walking-away trend will continue to rise, and we’ll have another fully-fledged solvency crisis in the US financial system.
When the NY Fed starts talking about the effective homeownership rate falling, then, there isn’t much in the way of a silver lining, even for those of us who want to see the homeownership rate fall. All we’re really talking about is the personal insolvency rate rising. And that does no one any good.