American culture has long promoted the idea that home ownership is key to the fulfilling middle-class lifestyle. You can be sure the National Association of Realtors will continue to do its darnedest to keep this interpretation of the American Dream alive; whether you’re buying or selling, it’s always a good time for Realtors to earn their livings.

The government wants its citizens to own houses. All recent presidents have promoted the idea of homeownership, through speeches and policies. To my memory, only Obama has said that not everybody should own a home. Nevertheless, the policies that encourage home ownership remain in place, like federal support for banks that lend money to prospective home buyers and like the mortgage interest tax deduction for owners.

Only half of all home owners claim the tax deduction either because they don’t know about it or they don’t have enough itemized deductions to be able to take the deduction. This may be because deductions reduce taxable income, and that’s more of a benefit for households with high income. A tax credit, on the other hand, would reach more homeowners, benefiting low-income home owners the same as those with higher incomes.

I can’t believe how many times I hear people suggesting that the tax deduction could be a major factor in the decision to buy a house. Even those who claim the deduction only get back a portion of their interest spent — interest they would not be paying if they were to rent instead. Say your friend wants you to let him hold $200,000 of yours, but this holding comes with a fee of $500 a month. He claims it’s worthwhile because once a year, he’ll pay you $2,100. That’s not exactly a good deal.

Renters don’t exactly have an advantage. Rents pay the owners’ interest — owners do get the deduction and renters receive nothing.

This country’s efforts to promote home ownership may drive resources towards a goal that could be harming, not helping, the economy. Several studies show that homeownership is correlated to — and may be the cause of — higher unemployment. A study in 1999 that outlined this relationship was largely ignored by economists. After all, the study was funded by the National Multi Housing Council, a trade group and lobbying organization that represents the interests of corporate landlords.

Since then, more studies, like this new study by David G. Blanchflower of Dartmouth College and Andrew J. Oswald of the University of Warwick confirms that home ownership levels determine unemployment levels. And the effect is particularly strong: an increase in home owners causes double an increase in unemployment. Because the effect is delayed by up to five years, however, it’s been easy for observers to ignore the evidence.

This doesn’t show that home owners are more likely to be unemployed themselves, but increased home ownership causes externalities that affect unemployment rates. The new study’s authors explain these externalities:

There are four main conclusions. First, we document a strong statistical link between high levels of home-ownership in a geographical area and high later levels of joblessness in that area… Second, we show that, both within states and across states, high home-ownership areas have lower labor mobility…

Third, we show that states with higher rates of home-ownership have longer commute times… Fourth, we demonstrate that states with higher rates of home-ownership have lower rates of business formation…

While this study focuses on the United States, other recent studies come to similar conclusions in Europe.

It’s easy to be skeptical of studies that show these results. We assume that home ownership encourages stable living, and stability contributes to lower crime in a region. Homeowners tend to be more involved in their communities than renters, and community involvement increases local job opportunities. The data show that these benefits aren’t enough to overcome the tendency for home ownership to cause unemployment.

A question with any study is whether the data show that there is a causation or just a correlation. For example, even though there are more large-company CEOs per capita living in Connecticut than in other states, you won’t be more likely to become a large-company CEO by moving to Connecticut. A good researcher has to wonder whether there could be some independent variables affecting both the tendency towards home ownership and the increase in unemployment.

The authors of this latest study are confident that they’ve ruled out independent variables. They show that home ownership directly causes the following:

• Lower labor mobility. People can’t quickly move somewhere else to find a new job, and so a household that rents can follow a new job quickly while a household that is rooted to a community through home ownership is more likely to pass on the new job or not be willing to look elsewhere for new employment.
• Longer commutes. People buy homes where they can better afford the housing for their particular job. Jobs are centered around cities, home ownership exists in higher numbers in suburbs. Commuting is expensive for both employers and employees.
• Fewer new firms and establishments. Higher home ownership results in more space being zoned for residential living, making it difficult for potential business owners to open new business near these communities. The “not in my backyard” attitude of home owners prevents economic development, resulting in fewer available jobs and higher unemployment.

The authors of the study are confident that they’ve controlled for variables, and therefore the data show an explicit causation between home ownership and unemployment, before the housing bust, after the recession, and through the recession. They admit, however, that researchers must undertake more experiments to build off these findings. The results as they are should be troubling for policymakers that promote home ownership.

The challenge in getting this message across is that home ownership is such a core component of the middle-class American life. When studies seem to attack someone’s way of living, people take the findings very personally. The choices families have made, in this case the choice to own a house rather than rent, contribute to a weakening of the labor economy, and no one likes to be told that their choices are “bad.”

Findings that are incongruous with established culture are more often than not rejected by the public. Because there still are positive externalities associated with home ownership that one might say outweighs the effects on unemployment, and because the results are an affront to society’s drive to make as many people home owners as possible, I expect it will be a long time before we see changes to society and policies that encourage household mobility over home ownership.

Do you think home ownership causes unemployment down the road?

Photo: Flickr
New York Times, Slate

{ 7 comments }

I’ve taken a cursory look at the possibility of investing in real estate near where I live, with the intent of buying a property for rental. The numbers don’t work well in my favor. I’ve confirmed this with friends experienced with renting their properties in the area; most would not do it again if given the choice. The small potential profit is not worth the extra effort and stress.

To make the numbers work more in the investor’s favor, there’s the possibility of purchasing foreclosed or pre-foreclosed homes. If you can get a significant discount on the price and minimize the out-of-pocket costs required to make the dwelling attractive, there’s a better chance of making a profit. Buying a house in a distressed situation, whether from the buyer in a pre-foreclosed status or from the lender or bank once foreclosed, is not very simple. Auctions are attended by professionals, and the best deals are monopolized by the most experienced investors. It can be difficult, expensive, and time-consuming to break into the elite group of foreclosure investors.

Zillow is making this process a little easier or less expensive for the amateur investor. I’ve been a fan of Zillow for a while. The website, and particularly the iPad application, helps me easily find public information about any property. While driving around neighborhoods in which I might like to buy a house, either for myself or as an investment, I can get an idea about the cost of the home.

The application uses a map and GPS to locate the house of interest, and provides details such as a history of sales prices and Zillow’s own market value estimate of the property. The application also identifies which homes are currently for sale and offers homeowners a chance to advertise their homes to potential buyers without officially putting them on the market. Of course, I don’t actually use the iPad while driving.

Now, the website also indicates when a home is in a pre-foreclosure or pre-market status. This means that the bank has initiated proceedings to foreclose upon the property, but the home is not listed for sale yet. Previously, this information had been difficult to aggregate or has been kept away from the general public by services that require membership fees. Zillow’s new feature brings a wider inventory of potentially better deals to more investors for free.

That doesn’t mean, however, that it’s going to be any easier for amateur investors — those without connections in the foreclosure real estate market in their location — to get better deals. Professional investors find pre-foreclosure deals within a day or two of the public filing, and with cash in hand and experience making deals, are often able to make the most out of the information they have. If Zillow’s information is as slow as two days, the best deals might no longer be available. That doesn’t mean it’s not worth pursuing, because the deals one might find with Zillow might still be better than the deals one might find if you wait for a foreclosure auction.

Zillow’s new development is bad news for companies who profit by charging membership fees to access an aggregation of public information. When a competitor comes in and offers customers the same information for free, the company that charges its customers must come up with a new business model fast or explain how their paid service is worth the price compared to the free service.

To feature foreclosure and pre-foreclosure listings, Zillow has introduced a foreclosure center, making it simple to search just for these deals without other listings cluttering the screen. A search in my ZIP code reveals a surprising number of pre-foreclosure properties within a mile. I don’t have to walk very far to see fifteen homes Zillow has marked as pre-foreclosure.

Without walking around to see these homes, the pricing looks favorable. The estimated foreclosure prices seem to be 15 to 20 percent below Zillow’s estimated market value for these homes, putting these properties in the “good investment” range based on that information alone. Of course, if these properties need a significant amount of work, the value as a potential investment decreases.

I’d be interested to hear what seasoned real estate investors think about this new development.

{ 7 comments }

I never liked the term “hustle” when used to discuss making money on the side. The word has the slight connotation of fraud or taking advantage of someone, and moving quickly to do so. Now, the word “hustle” is going to be linked to something more specific and decidedly negative. This was the name of the program Countrywide Financial and its acquirer Bank of America created for allegedly defrauding the government and taxpayers.

This is from the press release from the United States Attorney’s Office in the Southern District of New York:

Specifically, the Complaint alleges that from at least 2007 through 2009, COUNTRYWIDE, and later BANK OF AMERICA after acquiring COUNTRYWIDE in 2008, implemented a new loan origination process called the “Hustle,” which was intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans sold to Fannie Mae and Freddie Mac that later defaulted, causing over $1 billion dollars in losses and countless foreclosures.

The name “Hustle” is derived from the program’s official title, “High-Speed Swim Lane,” whose acronym is HSSL. The name of the program is a description of how loans move quickly from application to approval to origination to sales, without the friction and resistance of risk analysis or quality control.

Countrywide and Bank of America, once the largest residential mortgage lender in the United States, sold loans to Freddie Mac and Fannie Mae, pseudo-government agencies designed to make purchasing a home more affordable and to boost the real estate market. The companies regularly purchase mortgages from companies like Countrywide, repackage the loans as investments, and sell them to major institutional investors for a profit. The agencies trust the companies like Countrywide to represent the true risk of the loans, but due to the way Countrywide and Bank of America were processing the loans, allegedly through this organized “Hustle” operation, the true risk was not identified.

In cases, where risk had been identified, Countrywide and Bank of America allegedly engaged in falsifying documents.

Bank of America’s response

Bank of America has not yet responded to these allegations. The company did, however, announce a $0.01 per share dividend this morning. I’ll update this article as more information becomes public.

This particular bank continues to attract a lot of ire. Over a thousand Consumerism Commentary readers have been discussing Bank of America’s various class-action lawsuits, specifically the overdraft fee settlement for which affected customers are still waiting for their piece of the settlement.

Justice Department

{ 3 comments }