Re-Evaluating Home Ownership
Mark Perry has had a series of posts of late presenting the hypothesis that high rates of home ownership in the US may be detrimental as it reduces labor mobility. The argument goes that homeowners have a harder time moving for new jobs than renters do.
Homeownership
impedes the economy's readjustment by tying people down. From a social
point of view, it's beneficial that homeownership encourages commitment
to a given town or city. But, from an economic point of view, it's good
for people to be able to leave places where there's less work and move
to places where there's more. Homeowners are much less likely to move
than renters, especially during a downturn, when they aren't willing
(or can't afford) to sell at market prices. As a result, they often
stay in towns even after the jobs leave. And reluctance to move not
only keeps unemployment high in struggling areas but makes it hard for
businesses elsewhere to attract the workers they need to grow.
The argument makes sense on its surface, but I am having a bit of trouble buying into it (though I will admit that as an American, I am steeped in decades of home-ownership-boosterism, so I may not be approaching the problem without bias).
On the plus side, the selling a home and buying a new one certainly has more costs than switching apartments, particularly if you add in a moving premium for home owners who can accumulate a lot more stuff than apartment dwellers and the switching costs due to emotional attachment to the current house. Also, on its face, the argument is similar to criticisms of the economy of the antebellum south, where too much capital was invested in land and assets tied to the land.
However, I see a couple of problems with it. First, its hard to find an increase in structural unemployment rates in the past decades to correlate to the increase in home ownership. Second, the costs to change homes has been falling of late as the government-protected Realtor monopoly is finally being broken by technology and commission rates are falling. Third, my sense is (though I can't dig up the data) that the average time in a home is dropping, meaning homes flip owners more frequently, again indicating a decreasing barrier to moving.
I would, however, be willing to accept that in a high home ownership regime, falling home prices and lengthening for-sale times could exacerbate an economic downturn by slowing mobility and thereby slowing the correction. I would have argued in the past that this was offset by home equity as a savings tool and a source of cash in difficult times, but that could be different this time around as mortgage policies have tightened, drying up the ability to convert equity to emergency cash.
foxmarks:
“the average time in a home is dropping, meaning homes flip owners more frequently, again indicating a decreasing barrier to movingâ€
If true:
September 15, 2008, 12:05 am1) Shorter residence may not indicate increasing labor mobility. Moving up (or down) in the same laborshed is easier than moving to a new region.
2) Higher flip frequency need not suggest the barriers (costs) to move are lower, only that the net gain from relocation is greater.
ErikTheRed:
A big problem is that a great number of people use their home equity as "found money" that they blow on whatever, rather than an asset to be used for emergency savings.
September 15, 2008, 7:00 amFranco:
I think that this argument has merit. I recently read a report indicating that the average home owner is in their house more than 7 years now. My neighbor wants to move but is waiting for the value of their house to "go back up". I told her as delicately as I could that that was not going to happen any time soon. This argument actually makes sense from an economic perspective as it is a "switching cost". Brokers fees and moving costs were always a switching cost, add to that a loss on your house. Whereas in the past there were 2 "taxes" on moving, now there is a 3rd (whether it be real in the case of someone who bought at the peak, or psychological as it is in my neighbors case.) In any event, this additional cost should and will deter labor mobility in the case of affected homeowners. This effect is compounded by people asking too much for their houses so a mover faces selling their house low and buying their nexy house high. This doesn't concern me as I'd like to move out of Chicago to Indianapolis where house prices didn't go up so I'm not afraid to be. On the contrary, its like houses are for sale for half off down there.
September 15, 2008, 7:34 amXmas:
Definitely the wrong way to look at things. It's equally valid to say that jobs move to people.
From my narrow view of the job market, tech jobs pop up where the techies live (Silicon Valley in CA, 128 loop in MA, Atlanta now and maybe Austin). It's easier to find skilled labor where skilled labor already exists. I bet you could walk into all of the successful tech companies in Massachusetts and find chained-to-the-homes-they-bought DEC and Wang alumni in key positions.
September 15, 2008, 7:50 amDr. T:
"I would have argued in the past that this was offset by home equity as a savings tool and a source of cash in difficult times..."
We are long past the days when most homeowners paid at least 20% down and lived in their houses long enough to build up at least 40% equity. Most recent home buyers paid less than 5% down and took out ARMs that generated no additional equity after five years of payments. If house prices fall just 10%, these homeowners have negative equity. They are much less likely to move when they will lose 17% of their home's value (-10% house value and a 7% realtor fee).
September 15, 2008, 3:55 pmMethinks:
Even if the length of time people are spending in a home is dropping, it's still usually the single largest asset people own. In addition to being the largest asset, it's also very illiquid and that combination means the price risk of home ownership is very high. Much higher than people realize.
embedded in the buy/rent decision is a valuation of an option. It's the option to move quickly. When you rent, you're long that option and when you buy, you're short the option. The younger, less capitalized and less far along in your career you are, the more that option is worth to you. The more established and better capitalized, the less it's worth.
Thus, it's hard to imagine that home ownership doesn't reduce the mobility of labour under the old 20% down model.
By agreeing to lend 100% of the of price of the house, the lender effectively gives the home buyer a free option on housing prices and a free "move quick" option - making him a "rent-to-owner". Since this means that the home buyer has all the optionality of a renter and none of the risk of a buyer, he has every incentive to walk away from the mortgage, shifting the price risk of the illiquid asset entirely onto the lender. I think home "ownership" (a very inappropriate description) is up this much solely due to the ability to lever the purchase 100 to 1. Because the buyer has nothing to lose by walking away from the mortgage, I doubt we'll see a decrease in labour mobility commensurate with the increase in home "ownership" that has occurred in the past few years.
September 15, 2008, 4:50 pmFranco:
One thing to keep in mind is that walking away from a house has a cost too in terms of damage to your credit. Walking away is not without a cost. I would further posit that the more able you are to relocate to find work the more likely you are to care about this cost. Therefore, it's another ding on labor mobility. As for jobs moving to find the workers, I can guarantee that a laid off union GM employee in Anderson or Marion Indiana will starve to death before another plant opens in those towns. Honda is opening a plant in southern Indiana and actually refused to accept applications from residents of those counties!
September 16, 2008, 7:29 amDavid:
I see the argument, but I disagree: the advantage of home ownership is that eventually the owner stops having to pay for it. This is the same lease vs. buy argument that exists for everything else (eg. cars)
September 16, 2008, 10:33 amMethinks:
David,
Do you know that maintenance costs and property taxes don't go away after you pay off your mortgage?
September 17, 2008, 7:03 pmjohnpollock:
Yes the Author said really true, because the cities like N.Y, Manhattan,
the owners of the houses are had really suffered when they transfered to the other cities they suffered a lot than the rent holders.
=============================================================
johnpollock
FSBO
October 10, 2008, 6:13 pm