Possible Downside of Home Ownership

Is there a downside to home ownership? A recent Economy.com article says there could. This is out-of-the-box thinking that makes us think carefully about how difficult decisions we make in life both help and hinder our path to prosperity.

More people in the U.S. now own the homes in which they live, which is good. Isn’t it? The rationale behind the national push for a higher homeownership rate is that buying a home is considered a sound investment, socially desirable, and aids in preparing for retirement. Still, is it good for the economy?

Besides its beneficial attributes, homeownership can also be associated with higher levels of unemployment due to the lower mobility of labor that results. At a time when jobs are very scarce and home buying is hitting new records, one wonders whether workers are tying themselves down to one particular area at just the wrong time.

The benefits of homeownership are undeniable. Nonetheless, there are drawbacks. Greater homeownership can lead to lower mobility, resulting in higher unemployment. Imagine a world where people can move with ease from one place to another and one job to another, no friction. This world would yield the least structural unemployment. Now, give some of these people a reason to stay in one spot, such as a relatively illiquid investment, like a house. They would no longer be free to immediately go where the jobs are, and as such, they would experience longer periods of joblessness.

If there is an incentive not to move, and having a home that is difficult to liquidate is a definite incentive, then people cannot follow jobs when and if jobs leave. In this manner, homeownership can theoretically result in greater unemployment than would otherwise occur.

The empirical result that higher rates of homeownership are accompanied by higher unemployment has been documented by Oswald (1997) in Theory of Homes and Jobs; it is based on fixed and random effects models considering data from Europe and the U.S. from 1960 to 1990 at the country, region, and state level. The models controlled for location specific effects, isolating the impact of homeownership on unemployment. He found that a 1% increase in homeownership corresponded to a 0.2% higher unemployment rate. The relationship holds loosely for the U.S. and may be a factor holding back our recovery now and may contribute to a slower recovery in the outlook, especially considering the likelihood of higher mortgage rates on the horizon.

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