Economists: Homeownership leads to unemployment

An economics professor friend, knowing that I like to tell everyone to rent rather than buy, and that back in August 2011 I asked the question Does homeownership lead to longer unemployment? sent me this recent (May 2013) paper from NBER. Unfortunately the full text is not available for free online. Here’s the abstract:

We explore the hypothesis that high home-ownership damages the labor market. Our results are relevant to, and may be worrying for, a range of policy-makers and researchers. We find that rises in the home-ownership rate in a U.S. state are a precursor to eventual sharp rises in unemployment in that state. The elasticity exceeds unity: 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. What mechanism might explain this? We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. The evidence suggests, instead, that the housing market can produce negative ‘externalities’ upon the labor market. The time lags are long. That gradualness may explain why these important patterns are so little-known.

Shorter summary: One answer to my August 2011 question is “yes” (but let’s always keep in mind that John Ioannidis would predict that a subsequent paper will find a different answer)

Additional elated older postings on this blog:

13 Comments

  1. JJ Donovan

    June 4, 2013 @ 9:17 pm

    1

    Thank you! I am a regular reader of this blog and can’t believe I missed the May article.
    At 43 years of age, I have been renting out my condo in Medford, MA and renting here in Washington DC. This is now my 4th year. (2009 start.) I have this constant fear that the fact that I don’t own a home will negatively impact the amount of money I have for retirement. From the activities suggested, I am not constantly at home depot and take my time on other activities which hopefully are producing financial gains for the long term. I was also reminded many years ago by a book by Peter Schiff (the title which now escapes me) where he recounted that he was a happy renter. Thanks to economic data like this, I may once and for all remove this “weight” that I thought I had over my head about not owning a home for financial benefit. I yearn for the day that I can afford a nice condo in Boston or another vibrant city and I can walk to work, activities, etc. thereby further reducing my costs with no car and most likely further increasing my quality of life. Maybe I can even take the savings and finally learn how to fly!

    Thank you for the time that you put into this blog and the great facts that help my day.

    JJD- Happy Renter!

  2. jim

    June 4, 2013 @ 9:20 pm

  3. Kyle

    June 4, 2013 @ 11:04 pm

  4. Sarcastico

    June 4, 2013 @ 11:09 pm

    4

    Homeowners have less flexibility to relocate in the event of an economic downturn. Areas that have lost a lot of jobs also have more people wanting to move away from than move into leading to a depressed housing market and a loss in net worth for homeowners in economically depressed regions. The problem is that globalization has decimated the middle class in general, and the loss of core industries decimates the communities that grew up around them. Trying to equate homeownership with unemployment misses the root cause and only recognizes a relationship between symptoms.

  5. JPM

    June 5, 2013 @ 12:14 am

    5

    I believe the text is available through one of the authors’ blog:
    http://www.andrewoswald.com/docs/finalmayHomeOwnershipUnemBlanchflowerOswald2013.pdf

    A quick check of the data (see page 24 in the link): Does anyone really want to make solid claims based on the correlation in that set of data?

  6. Lelala

    June 5, 2013 @ 4:56 am

    6

    Maybe thats quite true:
    If you have bought something, meaning you’ve invested tons of money, into a house or an appartment, makes you somewhat inflexible.
    In US- & UK-english, you just say “real estate” or similar words.
    In fact, the wording is much more correct in Germany, where we say: “Immobilie” to such objects – the etymology is very correct here, since it says “Im-Mobilie”, translating literally to “something that you can’t move”.
    :-)

  7. George

    June 5, 2013 @ 9:10 am

    7

    I’m curious, how do folks compare this to other things in life such as leasing a car vs. buying / financing? Can the same be said about phone / cable / etc. service? What about car or life insurance, or even Obamacare?

    I think the trend toward renting started not too long ago when the concept of family changed. We no longer live in a close family circle like we used to 50 or even 30 years ago. It used to be that we took care of our retried parents, so we had to live near by, or even under one roof — not any more.

  8. WorkUnit12

    June 5, 2013 @ 11:20 am

    8

    Great! To be employed in the future we’ll have to live in our cars so we can get to the factory location in any given week. Of course, a wife or kids will just slow us down so to hell with that. Please sign my petition to get the company to provide us with shower facilities….

  9. philg

    June 5, 2013 @ 11:38 am

    9

    George: the “trend toward renting” that you cite does not exist in the United States. The trend (albeit a very gradual one) has been toward increased homeownership. The golden age of family cohesiveness that you describe occurred in an era when renting was more common (see http://en.wikipedia.org/wiki/Homeownership_in_the_United_States for how the rate of owning was lower in 1960 than it is today). Nothing stops a worker today from taking care of retired parents in a rented apartment or house.

  10. jay c

    June 5, 2013 @ 1:39 pm

    10

    Germany has a much lower rate of home ownership, < 40%. One additional negative externality of having high home ownership is the political effect of having a lot of homeowners. For example, in California Proposition 13 restricted the property tax rate assessed, and rate of increase, on homes. It has the effect of driving up prices and keeping people from moving while restricting the ability of the municipality to collect revenue. For example, my neighbor's house is worth $800,000 but he paid $756 in property taxes last year since he has lived there since before 1978. If fewer people owned homes, I believe this proposition, and similar measures in other states, would not have passed.

  11. jim

    June 5, 2013 @ 9:21 pm

    11

    I fully understand the benefits of renting vs owning. But because I am in my 50s, I can’t get over the fact that if you rent you never own anything. And when the time comes for you to retire, are you going to blow your whole Social Security check on rent?

    Because you probably won’t be getting a company pension, and you probably won’t be able to save enough cash to fund a 401k because your crappy middle-management job that you moved across the country for never paid you enough.

    You gotta sleep somewhere.

  12. DC Resident

    June 6, 2013 @ 8:05 am

    12

    Dogs make us less mobile and impact employment choices also.
    Yet still we let them own us.

  13. philg

    June 6, 2013 @ 8:32 am

    13

    Jim: The idea of owning a home as a form of retirement saving has not worked out well for people who lived in Detroit, for example, or a variety of bankrupt towns in California. Instead of buying a home at age 30 and hoping that you’ll want to live there at age 80 and/or that the house will have value when you’re 65 and want to become a snowbird, why not purchase an annuity from an insurance company? Admittedly there is a risk that the company will go the way of AIG, minus the taxpayer bailout, but that risk could be mitigated by buying annuities from two or three different insurers. I think it is safer to bet that MetLife or Prudential will be around 50 years from now than that a particular piece of real estate will have value. In my 49-year lifetime I have seen urban neighborhoods become so dangerous that nobody with money wanted to live in them, New York City go bankrupt, property taxes go up so much in New Jersey that a lot of retirees probably can’t afford to stay in their houses, many neighborhoods in New Orleans wiped out by floods, cities in California go bankrupt, a variety of cities in Michigan shrink to the point where houses are simply abandoned (e.g., Detroit, Flint). In some cases, of course, things recovered (neighborhoods came back, Americans gave all of their money to Wall Street and NYC was able to fulfill its pension commitments, etc.), but not necessarily on the schedule that a retiree would have required.

    Thinking more globally, how do you know that the U.S. won’t go the way of Argentina? That was once one of the world’s most promising countries and the future seemed as bright as the future of the U.S. If you’re 30 years old and considering buying a house you might live to age 110. That’s an 80-year horizon, which has been more than enough time for a country to go from one of the world’s richest to stagnant/poor.

    Or suppose that the 30-year-old has children. When it is time for them to start careers they find the best opportunities are on the other side of the planet, e.g., in Singapore, China, or Australia. You retire and want to follow them so that you can enjoy your grandkids instead of seeing them on Skype (or maybe 50 years will be enough time for Google Hangouts to catch on!). The U.S. has stagnated and the particular city where you lived has declined. Now that annuity would be a lot nicer, especially if it were in a basket of world currencies.

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