Shane Ferro

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The dark side of homeownership

June 6, 2013

Owning your home, long a pillar of the American dream, could actually be bad for the economy. In a new paper, economists Andrew Oswald, of the University of Warwick, and David Blanchflower, at Dartmouth, found that rates of high homeownership lead to higher rates of unemployment in both the United States and Europe.

Not only do high rates of homeownership keep people from moving to areas with good jobs, it also turns out that they tend to stunt job creation where the people live. What’s more, because suburbanites are unlikely to have a jobs in the same place that they live, they often spend a lot more time in traffic than they need to  — time that could surely be used more productively.

This is not a new idea for Oswald and Blanchflower. They’ve been working on this area of research for the better part of two decades, although this is the first time they’ve had the hard data to show how the labor market in the US is affected when homeownership rates increase. Even though individual homeowners aren’t necessarily more likely to be unemployed than their renter counterparts, a doubling of the homeownership rate leads to more than doubling of the unemployment rate, the researchers find.

High rates of homeownership lead to fewer businesses being formed, says Blanchflower. The authors aren’t fully able to explain this correlation, though they hypothesize in the paper that it could be a result of zoning restrictions in residential areas and/or a NIMBY (not in my backyard) attitude from homeowners. Fewer businesses in the area mean fewer jobs, which lowers the employment rate. People who cannot find a job near their home, but are tied down by a mortgage, then end up commuting long distances for work.

Switzerland is a prime example of low homeownership and low unemployment. Only about 30% of the Swiss own their homes, and unemployment in the country hovers just above 3%. Spain is at the opposite end of the spectrum, with 80% homeownership and more than 25% unemployment. The paper shows that OECD countries and every state in the US fall somewhere in between Spain and Sweden. Here’s the scatter chart: the higher the homeownership rate, the higher the unemployment rate, generally.

As the subprime crisis hit, Oswald’s ideas became somewhat popular, as various people began to argue that perhaps homeownership shouldn’t be the bedrock of our economy. Clive Crook argued back in December 2007 that the focus on housing could be holding our economy back. “If investment in housing goes up, investment in things that would expand the economy and improve future living standards—such as commercial building and business equipment—goes down”.

As Free Exchange added, putting people to work efficiently means having a labor force that can move around to where the jobs are. “Roots are for vegetables”, as the article puts it.

In a panel discussion on the Canadian television show The Agenda back in 2010, both Yale economist Robert Shiller (of the Case-Shiller home price index) and urban studies theorist Richard Florida argued that homeownership should be less idealized, and the government shouldn’t promote homeownership through tax breaks. As Crook notes in his piece, the UK abolished mortgage tax breaks and saw no change in housing prices. “In the US, labor mobility and residential mobility tend to go hand-in-hand, and it’s really put a crimp in the US ability to adjust to this time of economic restructuring”, said Florida.

There are reasons to argue for homeownership, of course. Not only is it a leveraged investment that can pay off handsomely (if prices go up), it’s a commitment device, “which forces people to build wealth rather than fritter away their income on consumer products”, as Felix Salmon pointed out, also back in 2007. Shiller responds that if you have the discipline and self-control to put that money in the stock market, you’d likely get a better return.

In 2007, as the economy was spiraling downward, no one really wanted to talk about taking action that might further collapse the housing market. But perhaps now that the economy is slowly marching towards recovery, it’s time to bring it up again and ask ourselves whether being a nation of homeowners is worth the price we pay in stunted economic growth. It may be time to do away with the mortgage-interest tax deduction, rezone the suburbs, or simply embrace Blackstone’s quest to own as many single-family homes as possible.