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Homeownership and Unemployment: Not So Fast

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Friday, 10 May 2013 05:12

Folks have been asking me about a new study showing a strong link between homeownership and unemployment. The study finds a long-term of elasticity of the unemployment rate with respect to homeownership close to 1. This means that if the homeownership rate in a state doubles then we should expect its unemployment rate to double. For the country as a whole, since the homeownership rate has risen by roughly 20 percent from its 1950 level we should expect the unemployment rate to be roughly 20 percent higher, after controlling for other factors.

These are striking results, but even as a critic of the cult of homeownership, I am not buying. The paper does include many tests for robustness, so there is no simple story of cherry-picking the data. But there are important questions of reverse causation. Suppose that states have weak economies so that many people leave for states with more job opportunities.

In this story the state losing people is likely to have a higher homeownership rate (homeowners are less likely to move) and the state getting people is likely to have a lower homeownership rate since the new arrivals are less likely to be homeowners. The study tries to control for this issue by having lags of up to 5 years, but it is certainly possible that trends in economic growth and stagnation are longer than this. It might have been useful to try lags of 10 years.

It is also striking that the states with the largest increase in homeownership are all in the south. If there was a rise in unemployment in these states was this a regional effect or due to homeownership? Including a regional variable might be helpful to see how it affects the results. In the same vein, immigrants are likely to be associated with both a lower unemployment rate (immigrants go to areas with jobs) and a lower rate of homeownership (recent immigrants don't own homes). I may have missed it, but it doesn't look like immigrant status is one of the control variables in the regressions.

One finding that may have a simple explanation is their finding that in the years 2000-2010 there was a strong tie between commute times and homeownership. I'll be a bit of a cynic here. Areas like Los Vegas and Phoenix were booming in the bubble years, these states saw substantial increases in homeownership. This was probably associated with an increase in commute times. The bust and drop in homeownership was especially pronounced in these areas. My guess is that they also saw a drop in average commute times. I don't know if this is really the story, but at first glance that would be my guess.

Anyhow, I can believe that homeownership has some negative impact on employment. There is the story of reducing mobility. This can be exaggerated (people do rent out homes and couples separate for work), but surely it is not zero. Also, policies that favor homeownership, like the mortgage interest deduction, undoubtedly pull capital away from productive investment. However, the relationships found in this paper seem too large to be plausible.

So chalk me up as a skeptic on this one, but it is an interesting paper that deserves serious consideration.   

 

Note:

It is interesting to see that the union density variable in these regressions is always negative and sometimes significant. This would suggest that higher union density is associated with lower unemployment rates. Much as I might like to say this is the case, my guess is that something else is at work.

States like Michigan and Ohio saw the percentage of workers in unions fall at the same time they lost hundreds of thousands of jobs in the auto and related industries. This could give the sort of correlation found in these regressions. This is the same sort of reverse causation that I suspect we see with homeownership and unemployment rates.

Further Note:

Danny Blanchflower, a co-author of the paper, notified me that he ran a regression that included a variable for the southern states to pick up any regional effect. He said that this actually made the results stronger, so clearly their findings are not driven by some peculiarity of the south that led to both higher rates of homeownership and higher rates of unemployment in the region.

Comments (10)Add Comment
...
written by PeonInChief, May 10, 2013 12:00
Two things probably promote homeownership in the South. The first is the relative cheapness of houses. People from California can sell their houses, move to Atlanta, pay cash for a house, and have a retirement fund left over. (I know someone who did this.) People moving to California from Atlanta might not even have a 20% down payment.

Second, landlord-tenant laws in the South are worse than in other parts of the country--and that's saying something, since the US is known for its limited tenants' rights. In Arkansas, for instance, tenants can be criminally prosecuted for not paying the rent. Military lawyers were distressed to find that, in many southern states, tenants could be evicted with no notice whatever after the landlord was foreclosed. (Military bases, particularly Air Force and Navy, were frequently located in areas with high foreclosure rates, and about 75% of military personnel rent their homes.)

And a side note: the South may have higher rates of homeownership, but it also had large increases in the percentage of severely burdened households--those paying more than 50% of income for housing--during the Great Recession.
chicken or the egg
written by NWsteve, May 10, 2013 12:28
one could relatively easily construct an argument that would propose that home ownership derives FROM a stable local economy which would likely begin with high wage employment and longer-term horizons...initially, given then-traditional policy incentives, why else would an individual or family chose to "buy"?

allowing these homeowner-enclaves to mature while the "jobs" begin migrating, often offshore, might suggest that this "job" mobility, again supported by newer policies, is the ignition point for subsequent "higher" local unemployment rates...

then, subsequent local replacement endeavors, now often more "service" oriented, take some amount of time to begin growing--thus, does the individual or family risk a move to a new region? or risk waiting-out their neighborhood's relative demise in the hopes that things-will-soon-get-better?

recent decennial changes in the US House of Representatives' State-by-State distributions from New England/Midwest to the South/Southwest certainly suggests that people still seek distant opportunities in greater numbers than those choosing to stay-put...

* * * * * * *

many forces converge on the hypotheses of the paper that Dr. Baker references...in the future, the role of likely-to-increase mortgage interest rates (and whether or not they continue as a deductible from income policy) may be a far greater factor for or against individual home ownership than current discussions are acknowledging...

to wit, in a generally more service-oriented economy, are very low mortgage interest rates required in order for the lower-wage dual-jobs to support home ownership?

cluck cluck cluck indeed...

...
written by skeptonomist, May 10, 2013 12:34
The authors say "The lags from ownership levels to unemployment levels are long. They can take up to five years to be evident."

Since 1945 the average length of an expansion period was 58 months according to the NBER. If cycles were perfectly regular of course you would see correlations between all sorts of positive and negative indicators with time lags on this order. National home ownership was high (record level) around 2006 and unemployment reached a peak in late 2009 and was still high in 2011. There was a causation in this cycle in that the bursting of a housing bubble was directly responsible for the recession, but housing bubbles do not always cause recessions. At other times home ownership may be up in expansion cycles because of general optimism, somewhat higher income - and lower unemployment. Did the low unemployment around 2007-2008 cause the high unemployment 2009-2013? Only in the sense of the general cyclical nature of the the economy.

The authors say they tested for cyclic effects, but those results need to be checked carefully in other ways.
Truth in Labeling: If you've got a mortgage you're not the owner
written by Wisdom Seeker, May 10, 2013 1:17
Figure 1 and Figure 2 in the referenced article are both deeply unpersuasive.

To the extent that there is any correlation at all, one should probably consider a common external cause. For instance, there are Federal policies promoting both homeownership and high debt levels (e.g. mortgage interest tax deduction), and high debt leads to bubble/crash behavior which leads to high unemployment...

Finally, as a lot of folks learned the hard way in 2008-2010, if you've got a mortgage and you don't have a guaranteed means of servicing it, you're not really the owner.

In fact, mathematically there's very little difference between a triple-net lease with an option to buy, and ownership with a mortgage. Many people who have been sold on the idea that they are "owners" are really just renters with a leveraged option-to-buy.

The true homeownership rate (counting properties without mortgages and properties with mortgages that can easily be serviced despite loss of job) is about half the reported rate.
Only one country?
written by ts, May 10, 2013 1:27
I would bet without even seeing the data, that homeownership rates will tend to rise during any period of a strong economy, which of course, is always followed by recession. And, of course, we just had the most extreme version of that with our recent housing bubble.

Does this imply homeownership rates cause unemployment? No, it just means some people are imputing a spurious cause to some natural cyclical correlation in extremely broad aggregated data. Perhaps they have an ulterior motive for finding a particular relationship. This is what lazy economists do.

Could it be that homeownership's relationship to lack of labor mobility (why is labor mobility a good thing, and to who?) has to do with having kids? Could it be that the reason higher homeownership rates are negatively correlated with business formation is that small business owners have a much harder time getting a mortgage?

After reading it, the implications raised by this paper and its values strike me as having a blatantly political agenda. This is a recipe for junk science.
...
written by liberal, May 10, 2013 1:31
PeonInChief wrote,
The first is the relative cheapness of houses.


Not exactly. It's the land underneath the house which is cheaper.

I live in a near half-mill house in a suburb of Wash DC, and there ain't no way this house would sell for anything like that in most parts of the country.
...
written by liberal, May 10, 2013 2:20
Wisdom Seeker wrote,
Finally, as a lot of folks learned the hard way in 2008-2010, if you've got a mortgage and you don't have a guaranteed means of servicing it, you're not really the owner.


Sad but true.
...
written by liberal, May 10, 2013 2:32
NWSteve wrote,
one could relatively easily construct an argument that would propose that home ownership derives FROM a stable local economy which would likely begin with high wage employment and longer-term horizons...


It's not even clear that's enough. If people get paid better, they might end up just bidding up the price of homes.

For most goods, there's a limit to how much that can happen, because increased demand will increase supply. And while we can build more houses, we can't increase the amount of land, and we can increase the amount of high-quality residential land (ie where people want to live) only slowly.
...
written by Chris Engel, May 11, 2013 7:07
Dean,

What do you say about actual reforms to fix this? Wide-spread public investment in property to develop public housing for rental?

You mention the mortgage deduction as an unnecessary de facto subsidy that diverts capital awya from productive assets.

But let's talk solutions -- what about larger, more active policies. Obviously with Teahadists running the House these kinds of things won't happen, but in a Progressive Fantasyland, wouldn't a policy idea be to, in addition to dropping the mortgage interest deduction, engage in widespread investment in public housing that provides nice subsidized rents to the young working generation. A lot of us don't want to get mortgages to own, but rents are kind of high right now in many areas and it's starting to look cheaper to get a mortgage than to rent, we could use some public competition in this area, because I frankly don't want to take on 1) principal risk, 2) maintenance costs. And i don't give a crap what the local bankers and real estate agents are saying about ridiculous financing offers and absurdly low home prices.
...
written by The General Welfare, May 16, 2013 10:01
Homeownership may be a proxy for "suburban sprawl", which -- intuitively -- seems more likely to cause higher unemployment than ownership itself.

Sprawling suburbs reduce the density necessary for high economic growth. Lower density, fewer ideas, less excellence (see Richard Florida, or centers of excellence work). That reduces the number of jobs available, reduces the competitive position of employees (who have a less credible threat to move to better positions) and reduces the pressure on employers to compete by increasing productivity and innovation rather than simply squeezing existing employees.

Moreover, in any recent data set, many of the jobs in sprawling areas are related to building out the sprawl itself. Those jobs necessarily disappear as the suburbs mature and age and the "growth"/grift moves on to greener pastures.

The deleterious effects of sprawl seem more likely to be important than any marginal reduction in mobility due to homeownership. The main reason people are reluctant to move is because it is highly disruptive to their lives, not because of a 6% broker's fee. If renters are more likely to move (which is certainly not true in cities with functioning rent regulation systems) it is probably because, absent a functioning rent regulatory system, people with enough money to have choices, choose to buy. It isn't homeownership so much as relative affluence that is doing the work here: Having choices is what makes them less likely to disrupt their lives chasing jobs.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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