May162013

New report may kill the home mortgage interest deduction

Home ownership hurts the economy. That’s the startling conclusion of a new report that demonstrates a strong correlation between high rates of home ownership and high rates of unemployment. While correlation may not be causation, the correlation is too strong to be ignored. Whether or not home ownership itself is the cause of unemployment is debatable, but whether it does or not, the report will be useful to politicians who need political cover to scale back the home mortgage interest deduction.

I’ve covered the merits of the home mortgage interest deduction in many posts. The bottom line is that the HMID does nothing to improve home ownership rates, it inflates the values of houses in neighborhoods dominated by high wage earners, and it’s very costly to the federal government. The only reason we still have it today is because lobbyists for realtors and homebuilders have fought successfully to maintain their subsidies. Politicians in Washington want to cut back this subsidy, but they need political cover to justify their decision. Trimming the budget is a good reason, and now with this report, they can also argue that the subsidy hurts the economy by increasing unemployment.

Challenge to Dogma on Owning a Home

By FLOYD NORRIS — Published: May 9, 2013

Homeownership is a good thing, for the individual and for society. Or so American governments, whether Republican or Democrat, have long believed. The benefits have been cited repeatedly in justifying the existence and expansion of the tax breaks given to home buyers.

But maybe it isn’t nearly as good as had been thought.

A new study by two economists concludes that rising levels of homeownership in a state “are a precursor to eventual sharp rises in unemployment in that state.” As more homes are owned, in other words, fewer people have jobs.

That’s a remarkable conclusion. Identifying the actual cause is a challenge because it’s difficult to conceive a reason why owning anything, stocks, bonds, gold, real estate, would cause unemployment.

The study, by David G. Blanchflower of Dartmouth and Andrew J. Oswald of the University of Warwick in England, does not argue that homeowners are more likely to lose jobs than are renters. But it does argue that areas with high and rising levels of homeownership are more likely to be inhospitable to innovation and job creation and to have less labor mobility and longer commutes to work.

Why would this be so? I can see how labor mobility would be hindered because it’s much more difficult to sell and repurchase a house than it is to change rentals, but how would home ownership stifle innovation?

We find that a high rate of homeownership slowly decimates the labor market,” Professor Oswald said.

At the simplest level, the authors of the study, released by the Peterson Institute of International Economics, point to the fact that the five states with the largest increase in homeownership from 1950 to 2010 — Alabama, Georgia, Mississippi, South Carolina and West Virginia — had a 2010 unemployment rate that was 6.3 percentage points higher than in 1950. The unemployment rates in the five states where homeownership went up the least — California, North Dakota, Oregon, Washington and Wisconsin — rose 3.5 percentage points during the period.

Such statistics are not persuasive by themselves, and the professors know it. Many factors obviously influence unemployment rates in any given state. North Dakota’s current boom stems from energy deposits, which would have been there no matter who owned the land.

Is it just random chance that the states with the largest gains in home ownership had the highest rates of unemployment while the states with the lowest gains in home ownership had some of the lowest? Correlations that strong are difficult to ignore.

But they say that the statistics show those patterns no matter how much they control for other variables and that the same picture emerges if they look at employment growth rather than unemployment rates. They say that the pattern existed before the crash of the housing market that began in 2007 and that the statistics are not dependent on including the more recent period.

That sounds like a statistically robust analysis.

If that is true, why have few noticed it before? “The time lags are long,” they write, up to five years before a rise in homeownership hurts an area’s unemployment rate. “That gradualness may explain why these important patterns are so little known.”

Nobody wanted to face this truth either. It’s not like the NAr is going to sponsor a study that might turn up conclusions like that. This analysis will undoubtedly be challenged by economists sponsored by the NAr, and it will be interesting to see how they explain this correlation — with bullshit no doubt.

Nonetheless, the idea is not new. Professor Oswald pointed to some of the data as far back as 1996, saying that in Europe as well as the United States a higher proportion of homeownership seemed to be associated with a higher level of unemployment. But other researchers soon concluded that the evidence did not support the thesis that homeowners were more likely to be unemployed than renters, and the correlation was largely ignored.

If the correlation is real, what could be the cause? The professors say they believe that high homeownership in an area leads to people staying put and commuting farther and farther to jobs, creating cost and congestion for companies and other workers. They speculate that the role of zoning may be important, as communities dominated by homeowners resort to “not in my backyard” efforts that block new businesses that could create jobs.

This conclusion argues against their main point. California is an extreme anti-growth state with nimbyism running rampant. If restrictive zoning and efforts to block new businesses were the cause, California would be a basket case.

Perhaps the energy sector would be less freewheeling in North Dakota if there were more homeowners.

Homeownership, in economists’ jargon, creates “negative externalities” for the labor market.

In Finland, there was something of a test of the thesis, the professors say. Finland changed its housing laws in the 1990s in ways that discouraged homeownership, putting the changes into effect at different times in different regions. “While homeowners are less likely to experience unemployment,” concluded Jani-Petri Laamanen, an economist at the University of Tampere who analyzed the Finnish housing market, “an increase in the rate of homeownership causes regional unemployment to rise.”

This phenomenon is international. It makes it much more difficult to say its caused by the unique circumstances in the few states analyzed here in the US.

Until the credit crisis, homeownership was generally viewed in the United States as an unquestionably good thing. President George W. Bush, like his predecessors, boasted of a rising homeownership rate in his administration. He summarized the consensus in 2005 when he proclaimed June to be “National Homeownership Month.”

Homeownership was certainly desirable in 2005, but it wasn’t the best idea.

“The spread of ownership and opportunity helps give our citizens a vital stake in the future of America and the chance to realize the great promise of our country,” he wrote. “A home provides children with a safe environment in which to grow and learn. A home is also a tangible asset that provides owners with borrowing power and allows our citizens to build wealth that they can pass on to their children and grandchildren.”

Homeownership, the president concluded, is “a bedrock of the American economy, helping to increase jobs, boost demand for goods and services, and build prosperity.”

That has been the dogma in Washington embraced by both Democrats and Republicans as far back as the 1920s.

The benefits of homeownership were said to go far beyond the obvious ones. A document distributed by the National Association of Realtors pointed to positive externalities.

Oh boy, here we go.

Homeowners’ children were more likely to do well in school and less likely to drop out. They were more likely to be well behaved.

Homeowners tend to be higher wage earners who place higher value on education because they believe it’s how they got their high-paying jobs. Parents who are concerned and involved with their children’s education tend to have children who preform better in school. The positive outcomes touted by the NAr are caused by good parenting, not home ownership.

Teenage pregnancy rates were lower, and the children of lower-income homeowners were less likely to wind up on welfare as adults than were children of similar renters.

Lower income homeowners have mastered the discipline of saving money and making consistent housing payments. This requires a greatly level of financial acumen than many who end up on welfare. Again, this has nothing to do with home ownership and everything to do with the character of the family.

I’ve seen the commercials from the NAr where they spout this nonsense. As a renter, I find it offensive. As a person who’s not a complete buffoon, I find these commercials an insult to my intelligence.

The credit crisis damaged that consensus as millions of homeowners lost their homes. Rather than creating wealth, homes had enabled people to gain cash by refinancing mortgages and live beyond their means until the crisis sent them into bankruptcy. The percentage of Americans owning their own homes is now the lowest since 1995.

I always enjoy seeing reporters talk about the housing ATM machine. Most ignore the issue or gloss it over.

But the good reputation of homeownership largely survived. Lawrence Summers, the Harvard economist and former Treasury secretary, complained in a Washington Post article earlier this year that not enough mortgage loans were being made. “The clearest evidence is the growing number of lower- and middle-income families paying rents to the private equity firms that own their homes at rates far above what a mortgage would cost,” he said, taking it for granted that owning a home was a good idea.

Home ownership is not always a good idea.

The professors’ paper could turn out to have appeared at a particularly inappropriate time for the interests that have long promoted homeownership and reaped bountiful subsidies for it. With the federal budget under pressure, reducing the tax benefits for homeownership might be easier if the halo around homeownership were to sag.

There have been proposals thrown around to limit those tax advantages by limiting or even eliminating the deductibility of mortgage interest.

I believe this paper will be used by politicians seeking political cover. Reducing the HMID subsidy will not be popular. Prior to publication of this paper, only the need to trim the deficit was a justification. Now politicians have something more substantial to offer as defense.

Renters, after all, receive no such deduction.

Nope. We’re just called upon to pay the subsidy.

“The mortgage interest deduction is one of the largest tax subsidies in the Internal Revenue Code,” Eric J. Toder, the co-director of the Urban-Brookings Tax Policy Center, noted in Congressional testimony last month. “Achieving a revenue-neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the mortgage interest deduction or some other equally popular and widely used provisions.”

There is no political argument that is more potent now than one that says jobs will be created by whatever is proposed. That claim was used last year to pass a bill making it far easier to raise capital from investors despite warnings that it also made investment fraud more likely. Imagine what might happen if politicians came to believe that encouraging homeownership was reducing employment.

It really doesn’t matter whether or not the politicians believe it. The only thing that matters is whether or not they can convince their constituents its true. If they believe they can deflect constituent criticism, the home mortgage interest deduction is toast.