Homeownership is a vaunted cornerstone of the American Dream. It's long been viewed as providing a path to financial security and the good life. And it's often posed as a barometer of the health of the economy writ large. it's been center stage, after all, in the ongoing conversation about the economic crisis and recovery. The American government has provided substantial incentives to spur homeownership for decades.
But, in recent years, a growing chorus of economists have argued that America may have gone overboard in its pursuit of homeownership. They suggest that high rates of homeownership distort the economy, tying people to places and restricting the ability of workers to move to jobs.
A new working paper provides powerful evidence of that higher rates of homeownership may in fact be connected to higher rates of unemployment. The study, "Does High Home-Ownership Impair the Labor Market?" [PDF], by economists Andrew Oswald, whose earlier research argued that high rates of homeownership undercut labor mobility, and David Blanchflower of Dartmouth University, employes a large-scale data set covering the past 25 years (1985-2011) and more than two million American households to examine the connections between homeownership and unemployment, labor mobility, commuting times, and new business formations.
The graph below, from their study, plots the association between homeownership and the unemployment rate for the past half century or so.
The bottom line? A state's homeownership rate may be a powerful precursor to "eventual sharp rises in unemployment in that state." The authors find that a doubling of a state's rate of homeownership "is followed in the long-run by more than a doubling of the later unemployment rate."
Higher rates of homeownership lead to higher rates of unemployment, according to the authors, in three key ways: by restricting labor mobility, generating longer commutes, and by lowering rates of new business formation.
"Blanchflower and Oswald aren't arguing that the owners of homes themselves are disproportionately unemployed," is the way Brad Plumer put it earlier this week in The Washington Post. "(In fact, homeowners tend to make out okay.) Instead, the authors argue that homeownership has a much broader — and negative — impact on the labor market as a whole."
My own research is in line with their view. I've found that metros with homeownership rates in excess of 70 percent tend to have relatively low levels of innovation, wages, incomes, and economic activity, while those with home ownership rates in the range of 55 to 60 percent have healthier economies, higher rates of innovation, and higher incomes. The higher level of rental housing in these metros contributes to their flexibility and economic dynamism.
The good news is that America appears to be moving slowly away from viewing homeownership as always good. The national homeownership rate has declined from a peak of nearly 70 percent before the crash to 65 percent today; and estimates from the Urban Land Institute suggest it may fall back further, to 60 or 62 percent.
A majority of Americans also say home ownership has lost its economic allure as an investment for the future. Nearly seven in 10 Americans (69 percent) report that "it is less likely for families to build equity and wealth through homeownership today compared with two or three decades ago." Most of all, three in five adults (61 percent) believe that "renters can be just as successful as homeowners in achieving the American Dream." This sentiment was felt among more than half of home owners (59 percent) and more than two-thirds (67 percent) of renters.
Perhaps we are seeing the rise of a new American Dream, one where mobility is coveted and putting down roots is postponed. Its rise might even help the country in addressing its persistent unemployment problem.
Top image: Key boxes are shown at a vacant home in North Las Vegas, Nevada April 2, 2013. (REUTERS/Steve Marcus)