As regular readers know, I’ve been away from blogging for a bit while I’ve been in the middle of a job transition. In my month-long hiatus, it seems like little has changed: the health care debate continues, the deflation/inflation and economic outlook remains uncertain, and the stock market continues to “climb a wall of worry.”
As the immediacy of the financial crisis recedes, the question of what has brought us to our present state remains largely unanswered. Or rather, there are dozens of answers, not THE ANSWER. Among the myriad causes that are put forth: the Fed, Wall Street greed, deregulation, excessive regulation, Chinese savings rates, the Democrats and the Republicans. In past posts, I’ve added my 2 cents by pointing to the culture of “overspeculation.”
Fundamentally, bad outcomes are generally the result of either bad luck, bad ideas, or some combination of the two. It may well be that the “bad idea” from which our financial upheaval arose is the belief that homeownership is an unequivocably good thing. I came across a prescient 2004 article in BusinessWeek that outlined some of the reasons why home ownership is not as advantageous to the poor:
- a house is often a poor family’s sole investment: concentrating their assets in an a vehicle that combines the historically lackluster long term returns of housing with the high risks of leverage
- the poor have a higher “cost of carry” in home ownership than the wealthy, because they often pay higher interest rates and their lower tax rate reduces the effective subsidy of a mortgage deduction
- while a mortgage was once considered a means of “forced savings,” the growth of easy-to-obtain home equity lines, interest-only and negative amortization mortgages all have negated the (already dubious) savings argument
British economist Andrew Oswald has noted the correlation between high unemployment and high home ownership. Although more recent work has created a more nuanced interpretation of that relationship (good overview in a Slate article here), this “Oswald Hypothesis” clearly has at least a grain of truth. The theory argues that home ownership makes people “sticky” geographically, and therefore less likely to move to find a job or better employment. This may be particularly true for the poor given that “borderline” housing is typically already less liquid than homes in upscale neighborhoods, further reducing labor mobility. This lack of salability in poorer neighborhoods is particularly acute in economic downturns, just the time when geogrpahic flexibility for workers is most important.
Those who defend policies that promote broader home ownership often point to social benefits — homeowners have a sense of “skin in the game” of American society. These arguments are no doubt true and important. But the advantages of reinforcing such a sense of inclusion should be weighed against the costs. Moreover, there other ways to promote engagement with community without the consequences attached to distorting housing market incentives.
This is not necessarily to argue against such incentives for home owners. Certainly, I and many others personally benefit from many of these. But every policy that distorts market mechanisms has consequences, many of which are unintended and adverse. We may not yet be through thoroughly testing the “Oswald Hypothesis.” If that theory is correct, current real estate conditions, whereby many homeowners have negative equity, will make labor mobility particularly poor this cycle. This, in turn, would suggest particularly intractible rates of unemployment and consequent sluggish economic growth. If blind faith in the “goodness” of high home ownership rates is indeed a bad idea at heart, we may not yet have seen all the corresponding bad outcomes.