May252013

We have strong economy because some people rent

In the 1990’s and early 2,000’s it was the policy of the US government to increase home ownership rates and endorse the general idea that everyone should own a home. It wasn’t even framed as a right or left issue since both Presidents Clinton and Bush pushed this 100% home ownership goal.   In addition, in the early 2,000’s the Federal Reserve, Freddie Mac, and Fannie joined in and changed their policies to accommodate this goal.  Of coarse, this led to an enormous amounts of  subprime lending, affordability products, and ultimately the bursting of the housing bubble.

Not only was this a bad policy, because of the all the bad loans with billions in tax payer loses, it actually bad economic policy.  By having some people rent and then some people own, it allows for the mobility of labor.  Employment is one of the main engines of the economy If you lose your job or get a better offer it’s usually easier to to pack up and move away if you are renting.   Even in the same location if you rent you can scale up or down your lifestyle easier.

Study: Higher levels of homeownership can kill jobs

By Brad Plumer, Published: May 7, 2013 at 12:09 pm

Economists have long wondered whether higher rates of homeownership can actually make unemployment even worse. One possibility is that if people are tied down to their homes, it’s harder to move to find a suitable job. So maybe more people should rent.

Back in the 1990s, British economist Andrew Oswald first showed that higher levels of homeownership were correlated with higher levels of unemployment across European countries and within the United States. Other possible variables — such as unionization rates — didn’t explain the variation in joblessness nearly as well.

Europe suffers from extremely poor mobility of labor, it really doesn’t have to do with rates of home ownership.  Most Europeans stay in their country of birth.  In fact, some workers refuse to even move to other parts of their own country.  This lack of movement contributes to unemployment issues.

The idea that owning a home makes it harder to find a job because of higher moving costs is now known as “Oswald’s hypothesis.” And it’s come in for plenty of scrutiny. Some economists, for instance, have argued that this effect might be counterbalanced by the fact that people who own homes have denser local networks, which makes it easier for them to find jobs in their local area.

Now, however, Andrew Oswald and Dartmouth’s David G. Blanchflower have a brand new working paper (pdf) suggesting that homeownership has an even bigger and wider effect on unemployment than anyone has realized. Here are the key points:

We find that rises in the home-ownership rate in a US state are a precursor to eventual sharp rises in unemployment in that state. …

A doubling of the rate of home-ownership in a US state is followed in the long-run by more than a doubling of the later unemployment rate.

It’s interesting to note that California has both a lower home ownership rate and high unemployment.  That fact is that California is business unfriendly. And if you remember circa 1980 California, I think most long term residents would agree that it was friendlier to business.  The state in fact attracted the best and brightest.  It’s been a gradual process of become business unfriendly and this latest recession demonstrated by the continued high employment while other states are slowly recovering.

Now here’s the interesting part: Blanchflower and Oswald aren’t arguing that the owners of homes themselves are disproportionately unemployed. (In fact, homeowners tend to make out okay.) Instead, the authors argue that homeownership has a much broader — and negative — impact on the labor market as a whole.

Why is that? The authors find that higher levels of homeownership in a state appear to be associated with lower levels of labor mobility, higher commute times, and fewer new businesses created. Taken together, those three factors tend to increase the unemployment rate. (Why fewer new businesses? One possibility is that homeowners are more likely to use zoning to restrict the activities of firms, though that’s just a hypothesis.)

This is just my hypothesis, but I think those are policies of individual states.  California has been know to be very difficult business environment, while Texas is know as being business friendly and has replaced California’s old reputation.  It has nothing to do with the home ownership  rates affecting the unemployment rates.

Now, Blanchflower and Oswald do try to check for confounding variables, but they’re very explicit that they want other researchers to scrutinize their results, in case they missed something. The stakes, after all, are quite high. Plenty of countries have expensive policies to promote homeownership — the U.S. government spends $70 billion per year on the mortgage-interest deduction alone. Yet no one really knows if homeownership kills jobs.

“Economists currently lack a full understanding of the interplay between the housing and labor markets,” the authors conclude. “We believe these issues demand the profession’s attention.”

Really the policy of the US government should be neutral to home ownership, it should be based on someone’s individual needs or desires. The recession didn’t end pro home ownership policy as most people believe.   If fact, the government is still encouraging home ownership through various tax incentive and programs.

  • Home mortgage interest and property tax deductions
  • FHA, which allows for low down payment and bad credit loans
  • HAMP and HARP programs that allows loanowners that can’t afford their house to stay in their home.

I’ve come to a different conclusion from the author.   The US has been promoting and financially supporting loan modifications to keep underwater or delinquent  loanowner in their homes ever since the bursting of the housing bubble. This has keep the “home ownership” rates higher than average.  However, according to this study we should let these people default and become renters again.  They would return to the mobility of labor pool and the overall economy will do better.

Strong home ownership rates that are not artificially induced are good, it allows housing to contribute to the growth of the economy.  Home ownerships are the at cost of retirement savings, credit scores end up damaging the economy and are a burden in the long run.   Our economy needs renters.  So, the next time you talk to a renter thank them, for the good economy.