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Higher Home Ownership Linked to Higher Unemployment

This article was written by in Real Estate and Home. 7 comments.

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

Updated December 15, 2017 and originally published May 10, 2013.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 7 comments… read them below or add one }

avatar 1 Anonymous

I don’t know… I think the problem is that it was too easy to get a mortgage. If people don’t buy too much house, then they would have more resources to spend on other things. Maybe they should run the study on a subset of homeowners?
It’s hard to say. They probably should look at a longer period.

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avatar 2 Anonymous

I could certainly see that lower labor mobility would have an impact.

Say you lose your job. You own a house. Its harder to move to pursue another job. So you’re often limited to jobs within easy commute of your house. If you rent on the other hand then you’re not as tied to any location and you can more easily move and relocate to where the jobs are.

I’d suspect its even worse nowadays with so many people underwater on their mortgages.

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avatar 3 Anonymous

Also, I’m assuming the study is concluding that unemployment is longer for homeowners. I can’t imageine any conclusion that owning a home causes you to lose your job. But if you do lose your job then you may remain unemployed longer and that can add up to higher unemployment overall.

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avatar 4 Anonymous

It’s an interesting proposition. I would bet money that people are less happy in their jobs because they have to stay in jobs they dislike longer because they own their homes, whereas renters could, in theory, leave with relatively short notice. Whether or not it causes unemployment is a leap I’m not sure I’m ready to make though.

Also, the interest deduction on your taxes as a justification for buying a home only really makes sense in certain circumstances – primarily when what you’re paying in interest (net) is less than what you would pay in rent. Even then you have to weigh the calculus of having a down payment tied up in your home versus having it invested elsewhere.

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avatar 5 Donna Freedman

Does homeownership inevitably result in unemployment? Of course not, or we’d be seeing a lot more people out of work. But certainly in some (maybe many) cases having a home would keep you rooted vs. finishing out your lease and moving to where the jobs are.
Since for some folks home = starting a family, it would be even harder to uproot your kids from school and friends — especially if one spouse is home with them. You’ve got the triple whammy of a “lease” you can’t easily break, a family you don’t want to disappoint and maybe less money coming in because you’re the only one working now. No pressure!

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avatar 6 Ceecee

I can see where homeowners might be less inclined to start a business. A new business takes up a huge chunk of time. There may not be enough income(early on) or time to maintain a home. I used to think that owning a home made one’s housing payments more controllable, but lately I’m not so sure. Just as landlords can raise the rent, municipalities almost always raise the taxes. Real estate taxes are SO high where I live that you are almost better off renting.

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avatar 7 qixx

Average length of time in a job 4.4 yrs (per NY Times)
I wonder how long the gap between ownership vs unemployment is exactly. The report says 5 years shows a 10% home ownership now leads to 2% unemployment in five years.

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