One consequence of the economic crisis is that the rate of home ownership has been slipping, as the chart below shows (via Calculated Risk).
A growing number of economists and urbanists question whether the United States has put too much emphasis on homeownership and over-invested in housing. Ever since the Great Depression, America has generously subsidized homeownership through the tax code and by other means. Housing does take up a significant share of U.S. investment comparatively speaking; and, in some regions, real estate, housing, and construction made up a huge share of the local economy, as high as 25 to 30 percent at the height of the bubble, bigger than education, health-care, government, or manufacturing. I’ve argued elsewhere that the two American dreams - of homeownership and of unfettered economic mobility - may be in conflict, as homeownership, especially in downturns like today, impedes mobility and makes it harder for individuals to move to work and the labor market on the whole to adjust.
The benefits versus costs of homeownership is an important debate. On the pro-side, Joel Kotkin makes the case for homeownership in his recent Forbes column. Stephen Slivinski provides a thorough review (via Tyler Cowen) of the downsides of what he calls America’s homeownership bias.
Simply put, Americans may have overinvested in housing. This has been a worry of economists for a while. It’s a concern based on what they see when they compare the rates of return - profit per dollar invested - for a variety of capital types … “When you observe that the measurable rates of return are different across the sectors,” said the Dallas Fed study author, Lori Taylor of Texas A&M University, “you either have to conclude that there are substantial unmeasured returns across the sectors or you have to conclude that society would be better off with a reallocation of resources.” These unmeasured benefits would have to be very large - at least $3,600 per homeowner in America - for the investment imbalance to be explained …
Robert Shiller, an economist at Yale University and an expert on national housing markets, has estimated that “from 1890 through 1990, the return on residential real estate was just about zero after inflation.” Throw in the costs of maintenance of the property and it’s easy to see how renting could certainly be cheaper than owning, even if you include the tax advantages. Yet the opportunity cost of those home investments - the foregone investment opportunities elsewhere - go largely unseen …
Being tied down to a house tends to make people less likely to leave an area in which employment prospects are deteriorating …A seminal study by British economist Andrew Oswald of the University of Warwick traced the link between unemployment and homeownership. Oswald looked at the United States, the United Kingdom, France, Italy, and Sweden between 1960 and 1996 and discovered that, on average, a 10 percentage point increase in homeownership tended to correlate with a 2 percentage point increase in the unemployment rate.
Recent studies of European data discover that you don’t see these sorts of correlations in areas with higher concentrations of renters. Renters are simply more able and willing to move away when their community hits the economic skids. In addition, workers who aren’t likely to move from a specific location might create frictions in the markets for labor skills. It’s a cost to the economy when people live in an area in which their skills are no longer valued. But there is a potential personal cost too: The overall welfare of that worker may suffer. Homeownership also tends to contribute to adverse political incentives. Incumbent homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations. These restrictions limit the number of houses that can be built in any geographic area and, consequently, keep housing inventory low and property values artificially inflated.
It appears that the crisis is causing a shift from homeownership to rental, as the graph below (also from Calculated Risk) shows. This trend may end up being a good thing for certain homeowners and for the flexibility of the U.S. economy as a whole.
One thing we know about crises is they frequently bring about significant changes in the system of housing tenure. The Great Depression and New Deal innovations in housing finance and housing policy, plus the post-war boom and infrastructure building, brought a massive shift toward single family homeownership. My hunch is it’s time for new hybrid forms of housing tenure which mix the benefits of ownership with the flexibility of renting.
Phoenix and Las Vegas have taken the biggest hits: Housing prices there have declined more than 50 percent in the past year. Miami is next, then Detroit where housing prices have sunk to mid-90s levels. San Francisco is the only significant talent region to be pummeled. Part of this is to be expected given the tremendous run-up in housing prices there, but still prices remain higher than 2000 levels. San Diego, L.A., and Tampa have all seen declines in excess of 40 percent.
Miami (145) and Tampa (140) break the pattern; their prices remain significantly above 2000 levels. My guess is that prices will continue to fall and sharply in these two markets in the coming months.
