The Deep Downside of Home Ownership
Mostly by accident, I have never owned a home, and consider it one of the best financial moves I've ever made.
Not because suffering through one of the worst real estate downturns in history would have slammed my finances, although that's likely true. But because in the last four years, my wife and I have lived in four different locations in three different states on each side of the country. Each move was driven by work and school opportunities that would have been out of reach had we been tied down to one home.
Our story is hardly unique. In one of the most telling studies looking at the benefits of home ownership, economists Andrew Oswald and David Blanchflower ask, "does high home-ownership impair the labor market?"
Their answer is "yes."
Looking at regional data since 1980, the pair found that "A doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate." That's simply massive.
The study makes clear that homeowners don't necessarily have higher rates of unemployment. Instead -- and this is really important -- they conclude that high rates of homeownership affect the entire labor market through lower rates of productivity and entrepreneurship.
Regions with higher home ownership created fewer new businesses, had longer commute times, and lower rates of labor mobility. All three impose costs on the labor market, and eventually lead to overall lower rates of employment. Importantly, the results aren't dependent on the years surrounding the housing crash, when millions of Americans became underwater on their mortgage. This is a deeply seeded trend.
The study controls for characteristics like age and education, but the authors caution against reading too deeply. The results are what they are, but correlation doesn't necessarily mean causation. "We are unable, in this paper, to say exactly why, or to give a complete explanation for the patterns that are found, but our study's results are consistent with the unusual idea that the housing market can create dampening externalities upon the labor market and the economy," they write.
But other studies show similar trends.
One 2011 study looking at household debt accumulation -- most which is mortgage debt -- showed that auto sales in regions where debt accumulation was the highest during the boom were down 40% since 2005. In regions where debt accumulation was the lowest, auto sales were up30%. Same stuff for zip codes that have a high percentage of homes with underwater mortgages. The "American dream" of owning a home can be detrimental to the "American dream" of a strong economy.
Now, owning a home makes sense for a lot of people. But to me, the study has two obvious takeaways. One is that while many of us focus relentlessly on the costs of renting -- you're throwing your money down the toilet! -- the costs of owning a home can be far greater. Worse, those costs are largely hidden, since it's hard to calculate the price of not being able to easily move for a new job.
Two, there are hidden costs to subsidizing home ownership. The highly popular mortgage interest deduction is one of the largest tax deductions in existence. The FHA is now a major player in the mortgage market. Both seek to promote home ownership without much thought about the knock-on costs, like lower job mobility.
In 2004, president Bush addressed the National Association of Home Builders:
For millions of our citizens, the American Dream starts with owning a home. Home ownership gives people a sense of pride and independence and confidence for the future. When you work hard, like you've done, and there are good policies coming out of our nation's capital we're creating a home -- an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.
Be careful what you wish for.
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