A look at historical data has unearthed a strong link between an area’s homeownership rate and its unemployment rate, a correlation that seems surprising on the surface and calls a variety of national policies into question.
Dartmouth economist David Blanchflower teamed with Warwick University’s Andrew Oswald to examine data going back to 1950, across the continental United States, and found that as the homeownership rate grew in an area, so did the unemployment rate (albeit with a delay of up to five years). The data included millions of randomly sampled Americans.
“I have become convinced that by boosting home ownership we have ruined our labor market,” Oswald summarized.
The correlation flies in the face of conventional logic that homeowners make more involved citizens and more stable local economies. But the researchers contend that it is this very stability and involvement that damages the local job market: homeowners are less mobile than renters, and cannot easily move to follow the jobs. They may turn down a job offer if the commute is too long, rather than moving. And when it comes to new factories or corporate buildings sprouting up nearby, homeowners are far more likely to throw a fit to their local representative in government, shouting “Not in my backyard!”
A look around Europe reveals similar patterns: Switzerland has a homeownership rate of 30% and an unemployment rate of 3%. Spain has a homeownership rate of 80%, and an unemployment rate of 25%. Germany has a healthy unemployment rate of 5.3%, and a modest homeownership rate of about 54%.
All of which calls into question homeownership as a fundament of the American Dream; for years, politicians of all stripes have been pushing homeownership as a national goal, and pumping billions of dollars into programs to boost homeownership. Consider President Carter’s 1977 Community Reinvestment Act, which effectively created subprime mortgage lending to make money available for poorer Americans with weak credit. Consider President Clinton pushing the Department of Housing and Urban Development (HUD) to make loans even more available to poorer Americans, and the subsequent The National Homeownership Strategy. Here is an excerpt from their published initiative, The National Homeownership Strategy: Partners in the American Dream
“For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.”
Read: “Find creative ways to lend to first-time homebuyers with little cash and low income.” (This strategy initiative, including a foreward by President Clinton, was available on HUD’s website until 2008, when it was quietly taken down.)
It continued with even more vigor under President George W. Bush and Alan Greenspan’s too-low interest rates, and Clinton and Bush were successful (kind of): from 1994 to 2004, the homeownership rate rose from 64% to 69.2%. It worked… until it stopped working, and these creative subprime loans caused a global financial crises and a housing bubble from which real estate markets are still recovering.
The federal government still subsidizes these loans today; Fannie Mae and Freddie Mac are famously guaranteed by federal taxpayers, leading to occasional grumbles about the risk of massive public losses in bad years. There are dozens of public programs designed to help subsidize mortgages for first-time homebuyers. First-time homebuyers often do not even have to pay their share of real estate taxes, at the settlement table. Just this past summer, President Obama declared his continued commitment to his predecessors’ push: “The most tangible cornerstone that lies at the heart of the American Dream, at the heart of middle-class life, (is) the chance to own your own home.”
But the U.S. homeownership rate has dropped over the last five years, as housing markets nationwide correct themselves. It reached an 18-year low of 65% earlier this year, although third quarter data shows a slight rise to 65.3% according to the Census Bureau.
Homeownership is wonderful for many Americans, but should the federal government spend billions of dollars each year to push a dream that comes with the nightmare of high unemployment?