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?
Published or updated May 10, 2013.