Home Ownership, Wealth, and the Economy

The journal, The Economist, recently asked its readers to comment on an interesting proposition: Should Home-Ownership Be Discouraged? It is not too surprising that such a question would come up given the turmoil caused by collapsing housing bubbles here and in Europe.
Andrew Oswald was given the task of arguing in the affirmative.

"High home-ownership in a nation is like a treacle blanket thrown over the surface of the country and economy. With a high degree of owner-occupation, everything slows. Folk get stuck. Worse, they become long-distance commuters and clog up the motorways for their neighbours. Renters can up sticks and go to new jobs. In that way they do the economy a favour. Milton Friedman knew this. In a famous speech published in the 1968 American Economic Review he said that the equilibrium rate of unemployment depends on the flexibility of the housing market."

Oswald is well-known for contributing a study that produced a correlation between national home-ownership percentages and unemployment. He also suggests that focusing on the value of a home as the dominant investment can be destabilizing. Germany and Switzerland are provided as examples of healthy, renter-dominated economies that survived quite nicely while others collapsed during the Great Recession. Obvious examples are Spain and Ireland.

Oswald also suggests that investing so much wealth in home equity causes an imbalance in the economy wherein more productive investments are ignored.

"In the past few decades, in the hope of getting untaxed capital gains way above their true labour earnings, many people in industrialised nations sank their spare cash into buying larger houses or building extra bedrooms to make a bigger home. Tax systems, and lightweight TV programmes about how to make easy money, encouraged that. Our countries ought, instead, to design tax systems that encourage people to invest in productive real activities and in innovation. Renting leaves money free for better purposes."

Oswald raises some interesting points. A home and a mortgage are an anchor that is not easily shed if one wishes to move unless there is a lively and rising housing market that one can sell quickly into. There is also the question of the stability of housing markets. If a house is viewed not just as a home but as an investment, it is implicit that it is expected to outperform inflation. In fact, it also has to be competitive with other forms of investment. But is there any reason why housing should outperform inflation other than when being driven by speculation? The ease with which housing prices can rise and fall makes one suspicious about the stability issue.

The assumption of home ownership as not only a good investment, but as a necessary investment, is well-imbedded in our psyche. Consider this data from an article be David Resnick and Dean Baker of the Center for Economic and Policy Research.

The authors were studying another issue, but found it necessary to break out data on wealth into categories of homeowners and non-homeowners. The difference between the two categories is astonishing. The data is based on the 2007 Survey of Consumer Finances produced every three years by the Federal Reserve. The 2007 compilation is the latest available. That document also produced this table:

Of the wealth of many homeowners, nearly half consists of the value of the house. This would seem to indicate that those who have the motivation and the money to invest consider home ownership as a fundamental component of their financial planning. And it clearly seems to have paid off in the past.

Oswald would argue that all that wealth tied up in inert structures would better serve the economy if invested in some other manner.

One issue Oswald does not discuss is the question of whether or not home ownership will be a good investment going forward. Playing the housing market in the past usually involved investing as much as one could in a home in order to get into a "starter" house. Inflation in income and rising home equity then allows one to sell the first house and buy a bigger and better house. This usually involves repeating the process of extending oneself financially in order to make ends meet until inflation allows the mortgage pain to recede. Eventually one finds a satisfactory home and lets the equity increase.

In addition to the assumption that the price of a house will inevitably increase, the procedure for investing in housing successfully assumes the individual has control over the timing of housing purchases and sales. If the nature of the economy has changed such that the desire or ability to maintain long-term roots in a given location has vanished, then the game is over. Young adults who would have been looking at that starter home in the past, might now be looking at their financial futures in a totally different way. Career uncertainty and job churn seem to be what they can anticipate. This is not necessarily bad; it can even be a stimulating situation. But for them it makes much less sense to purchase a home unless they have enough money that they can risk losing some value by an inopportune purchase or sale.

It is a good time to be old and sitting on a lot of equity.