"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Saturday, June 23, 2012

Homeownership Means Little To Economic Growth

A recent article in the Atlantic http://www.theatlanticcities.com/jobs-and-economy/2012/06/homeownership-means-little-economic-growth/1379/ documents the finding that home ownership is not correlated or even associated with economic growth – that is, buying a home does not guarantee individual wealth; and policies to promote home ownership are extravagant wastes of money.

Robert Shiller of Yale University documents that from "1890 to 1990, the rate of return on residential real estate was just about zero after inflation." Other studies have shown how America’s historic over-investment in housing has distorted its economy, leading to under-investment in technology and skills. Or as Nobel prize-winning Columbia University economist Edmund Phelps bluntly states it: "To recover and grow again, America needs to get over its 'house passion.'"

To find out if this premise was correct, the author of this article, Richard Florida and  Martin Prosperity Institute colleague Charlotta Mellander  looked at the statistical associations between the rates of homeownership and key economic development indicators like income, wages, productivity, innovation, and human capital across America's 350 or so metro areas.

Florida concluded that “the economic growth and development of cities and regions is generally thought to be driven by three key factors: innovation, human capital, and productivity. Homeownership, it turns out, is not related to any of them.”

Take innovation and high-tech industry. Homeownership bears little relation to either, being weakly negatively associated with the concentration of high-tech industry (-.20) and not associated at all with innovation (measured as the rate of patenting).

Or consider the percentage of college graduates or share of highly-skilled knowledge/creative jobs. Again, nothing. The arrow in fact points in the wrong direction. Homeownership is weakly negatively correlated with both the share of college grads (-.27), and with the creative class share of the labor force (-.30).

Even more compelling is the lack of any correlation between homeownership and productivity:

Most metros with high levels of homeownership have relatively low rates of productivity. Indeed, large metros like New York, Los Angeles, and San Francisco combine relatively high output with relatively low levels of homeownership. The same is true in Silicon Valley: despite the fact that many continue to think of it as a "nerdistan," the San Jose metro provides yet another example of high productivity alongside low levels of homeownership. 

[Concerning] the association between homeownership and wages, again across all U.S. metros, the pattern is even more striking. Higher levels of homeownership are mostly associated with lower wages.

Large metropolitan areas continue to draw young professional and tech singles who want close-in, vibrant urban neighborhoods, are in jobs that are easily transferrable to other markets, and already have company investment plans which earn well and promise better.  Washington, DC is a good example.  The rental market is squeezed, and the highest rents are in the most densely-populated urban areas.  One of the reasons that DC and other metro areas are so productive is because of the shared communities being formed by mobile, innovative, creative people.  Washington, once a backwater of Southern gentility and segregation, has now become a destination city. 

One of the most important phenomena in American society that affects the supply of and demand for housing is the shift from a manufacturing to a knowledge economy.  As suggested above, such a knowledge economy requires mobility and flexibility; and new ‘transient’ communities of talented, ambitious individuals has more relevance than the more stable ones of the past that grew up around industry.

As importantly for national policy, housing no longer drives the economy:

It used to be that homeownership signaled and led to economic growth. But that relationship was tied to the industrial era, when building and buying more homes primed the pump of America’s great assembly-lines, increasing demand for cars, appliances, televisions, and all manner of consumer durables. Those days are gone. The United States is a now knowledge and service economy; less than ten percent of Americans work in some form of manufacturing and just 6.5 percent are engaged in actually producing things. The stuff Americans buy is largely made offshore.

In other words, it used to be that building a new home generated all kinds of productive American enterprise and employment; and that living in a single-family home required two cars, appliances, and other appurtenances.  Now, while home-building still generates that economic activity, it is offshore. “ Instead of leading to economic development, higher rates of homeownership today are associated with lower levels of it. Homeownership is either not correlated or negatively correlated with the big drivers of economic development.”

Writing recently in the Wall Street Journal, Dan Gross notes the shift in this country toward a "rentership society." But this is not to say that the U.S. is destined to become a "nation of renters." The Urban Land Institute projects that [home ownership] will [settle in the] low 60 percent range over the next decade or so. The rate of home ownership ranges from the mid-50s to low 60s in many of the most highly productive, innovative metros like San Jose, San Francisco, New York and Los Angeles.

A homeownership rate of between 55 and 60 percent seems to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread homeownership is no longer the key to a thriving economy.

Why, then, should government continue to favor the building and purchase of houses?  Are the billions of dollars in tax revenue lost to mortgage deductions realistic in this era of structural adjustment and change?  If there were less incentive for individuals to purchase homes, they would invest their money elsewhere, perhaps in the knowledge economy (Apple, Google, Intel, etc.) or more generally in NASDAQ securities.  Given the recent sub-prime mortgage crisis, where people got in way over their heads and were lured by an artificially hot housing market, letting the market settle freely to determine real rental-owner proportions would be a good solution for many reasons.

Of course, owning a home has long been part of the American Dream, and politicians are very reluctant to tamper with it.  Reality always gives way to ideals, at least at first.  The 1950’s image of the newly-returned GI carrying his wife across the threshold of his new home dies hard.  Never mind that the significant government subsidies provided to that new homeowner are no longer affordable or are directly related to productivity; or that there is a structural change happening in the US economy.  Politicians still look out on the horizon and see the little, white-frame house, yard, roses on the trellis, happy children playing in the sprinkler.  Young people see bo-ring; and economists say 'so yesterday’.

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