By Paul M.J. Suchecki  Thu Jan 16, 2014

To Keep Working Rent, Don’t Buy

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Although conventional wisdom holds that the path to a better financial future lies through home ownership, an intriguing 2013 study claims,” 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 rates.”

Does High Home-Ownership Impair the Labor Market? was authored by David G. Blanchflower, Ph.D., the Bruce V. Rauner ’78 Professor of Economics at Dartmouth College and Andrew J. Oswald, D.Phil., Economics, Professor of Economics, University of Warwick.

The negative economic impact they observed was blamed on three factors:

  • A reluctance on the part of home owners to uproot themselves to take on new jobs
  • Opposition by home owners to opening new businesses in their areas, putting a damper on economic growth through zoning restrictions as locals react to “not in my back yard” (NIMBY) pressures
  • Longer commutes which hamper growth by wasting time and money

Blanchflower and Oswald took the U.S. data and determined the results of their study when applied to other Western countries. Looking at just two, far older than the U.S., the researchers suggested that their report explains why Spain, with an 80 percent home ownership rate, has more than 20 percent unemployment, and Switzerland, with 30 percent home ownership, has just 3 percent unemployment.

The study was based on recent and historical data primarily from the U.S. The researchers took a detailed look at work, commuting and home ownership data of 2 million randomly selected Americans.

Although the researchers don’t suggest that homeowners themselves have higher rates of unemployment, Blanchflower and Oswald contend that high home ownership rates can gradually distort the nature of the labor market so that fewer people keep working. Both claim that the change is so subtle, over five years or more, that the cause and effect has gone unnoticed until now.

How Americans keep moving

One source of inspiration for their study was Milton Friedman’s 1968 address to the American Economic Association. There he propounded that the natural rate of unemployment depended to a large extent on the degree of labor mobility in the economy. Blanchflower and Oswald linked labor mobility to the flexibility and dynamism of the housing market in response to changing economic circumstances. From 1947 until the end of the ’60s, during a period of rapid economic expansion,  about one out of five Americans moved their homes annually. In 2010-2011, that number dropped to 11.6 percent.

The researchers did extensive regional analysis and found that a high percentage of owner occupation had a negative structural effect on the labor market in those areas. Home ownership in the United States has grown significantly since 1900, when only about 46 percent of Americans owned their homes, peaking at 69 percent in the year 2004.  Recent economic troubles in the U.S. were in part caused by collapse of the housing market not long thereafter according to most experts.

The study is all too easy to dismiss as an argument of “post hoc propter hoc,” after this because of this, but the work looks solid.  It should be seriously mulled over by policy makers in an era of competing priorities. They might have to reconsider the significant tax breaks offered to homeowner as a spur to economic activity, like the mortgage interest tax deduction.

If you do decide to buy, get the most favorable interest rates on home mortgages here.

 

Related Stories:

Should I Rent or Buy? – Borrowing

How to Rent an Apartment With Bad Credit How to Rent an Apartment With Bad Credit

What Exactly Is a Rent-to-Own Home?

 

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