Economists: Home ownership leads to unemployment
blogs.law.harvard.edu
blogs.law.harvard.edu
There is a lot of "affordable" ($400K to $600K) single family homes in the San Fernando Valley, or towards Orange County, so I had a lot of coworkers buy homes in those areas. If you work in Venice, a house in Torrance is about a 45 minute commute by car. I know this will sound absurd to a lot of people in HN, but if you told a Los Angelan your commute to work was 45 minutes each way, they would say "that's pretty good."
However, if you bought a home in Torrance and live there and a company in downtown LA wants to hire you, even though you're only driving about another 8 miles or so, your commute will probably explode close to an hour and a half, and at least one day a week there'll be some clsuterfuck of an accident on one of the freeways, and you'll have the lovely experience of leaving your house at 8:00am and somehow still being late to your 10:00am stand-up meeting. Fun times!
So I saw home ownership cause former coworkers limit their economic mobility to within one section of one city. For them, it was an option to simply wait until a desirable job opened up in the areas with a bad-but-not-intolerable commute, or they were able to mitigate commutes by negotiating flexible hours with their employers (e.g. working 7am to 3pm, or 11am to 8pm, or only coming in 2-3 days a week, etc).
I recognize Los Angeles' traffic is about as bad as it gets as far as a home ownership "anchoring" someone, but if home ownership causes a reduction in mobility for professionals in a high-earning and high-demand field, I can only imagine the kind of impact it has on the rest of America.
I don't think most people in America suffer in quite the same way. Ok, the NYC area can be that bad but most people use mass transit. Maybe there's room to make the roads even wider in CA?
Seriously, the problem is self-inflicted and was easily avoidable with some better urban planning 4-5 decades ago.
LA has great transportation bones and layouts (http://www.humantransit.org/2010/03/los-angeles-the-transit-...), but it cannot densify, so it's stuck at a bad level of too dense for cars to work well but not dense enough to be primarily transit based. Metro LA is denser than metro Boston, SF, or Chicago.
Malarkey. I live in LA & I don't know a single person who would say that.
Anecdotally, my father has a pretty specialized job and got burned repeatedly in the housing market as he moved around for work. In his case it probably would have been a lot better for him if he'd rented almost every home he ever owned. In my case, I'm settling down with my family, friends, and extended family. I do not intend to move for another 20-30 years regardless of work. I think people should take this view seriously... if you want to stay where you are for 30 years and are willing do that despite potentially limited career (and financial) opportunities then owning a home makes sense (and managing your finances to enable this kind of lifestyle makes even more sense). If you want to pursue "the best" work or are concerned about financial security from employment you should consider not buying a home so you can remain flexible.
I obviously haven't read the paper, but the idea of home ownership negatively affecting employment is interesting.
http://www.nytimes.com/interactive/business/buy-rent-calcula...
As you pointed it out, a key factor is how long you are going to remain in the house.
Another key factor: house price appreciation and your ROI of capital. If house prices (adj. for inflation) don't rise much (as last 100 yrs or even 40 have shown) and you can make several percentage points above inflation on investing what you would have put into a down-payment, it doesn't matter how long you live in the home.
It's all in what kinda SWAGs you make. The default values in the NYtimes calculator are 1100/mo equiv. for $172k, but based on price to rent ratios here in Austin (near 20? http://www.deptofnumbers.com/affordability/texas/austin/) that home price would be near $250k
Let's assume you're 30 by the time you're even ready to buy a house. At that point, in another 30 years there's a significant chance you'll be either dead or within 5-10 years of death. Essentially, what you're saying when you buy a house is that you don't intend to move ever again in your life. That's a pretty grave commitment.
If you know you're going to live somewhere for 20 years it usually makes a lot of sense to own, but I don't know why we ascribe that aspiration to all our real estate needs.
People want to own homes because #1 they believe it is a status symbol and #2 they believe the value will go up. Remove either and it wouldn't be so hot. Fractional reserve lending and economic policies toward price inflation have punished renters for a long time.
Try convincing someone who thinks home ownership is a good deal that it isn't. I've never succeeded.
- Even if the value doesn't go up, eventually you'll pay off your mortgage and be able to live more cheaply. If you rent, you'll be paying rent (which will probably be steadily increasing) forever. If there's inflation, your fixed mortgage payment becomes smaller and smaller in real dollars over time. And while you're paying your mortgage, you get to deduct the interest from your taxes.
- If you own your home, you can't be suddenly thrown out because the landlord wants to demolish the building, or raises the rent to more than you can afford (e.g., due to the gentrification of the neighborhood).
- In some areas, owning a home can give you access to better school districts.
- Detached houses have more space and privacy than apartments. You're less likely to be disturbed by your neighbors, etc.
- A home that you own is yours to do with as you please. Want to put a pool in the backyard? Sure. Want to remodel the kitchen? Just call a contractor. Want to convert your garage to an office? That's OK. Want to rent out your house while you go on vacation? There's nobody you need to ask for approval.
In 30 years, in most cases. Just in time to retire and collect your smaller, fixed retirement income. How convenient!
That's a bit misleading. The money you save by not paying off a mortgage should of course go to other investments. You can even put it into housing (just not into the house you live in, for the sake of argument).
> - In some areas, owning a home can give you access to better school districts.
American laws are strange.
> - Detached houses have more space and privacy than apartments. You're less likely to be disturbed by your neighbors, etc.
You can rent houses, too. And you can buy apartments, too.
> - A home that you own is yours to do with as you please. Want to put a pool in the backyard? Sure. Want to remodel the kitchen? Just call a contractor. Want to convert your garage to an office? That's OK. Want to rent out your house while you go on vacation? There's nobody you need to ask for approval.
Yes, that's an important benefit. On the other hand, if anything's broken or there's legal trouble, it's yours to fix, too. It's a bit like owning a business vs just working in one.
[1] - http://www.feifeishi.iie.com/publications/wp/wp13-3.pdf
The more interesting argument is that the government has promoted home ownership and home loans for decades. And once again the involvement of government leads to suboptimization.
If more people were renters, there would be more of an economic incentive for more affordable housing.
I've also observed that when comparing a group of loans, those with homes were almost as likely to default on a loan as those without homes and it had minimal impact despite most people assuming that having a home makes a person "more stable." I have definitely seen many situations where a home becomes the priority over life, family and personal finances as well.
On the flip side, this argument also assumes that if consumers get better jobs, make more money, etc. that they'll actually save and/or invest more and the unfortunate reality is that most people just tend to increase their rate of consumption proportionately to their income/bonus increase.
So the nature of having a forced savings plan through a mortgage payment requires them to put money away yet still limiting their ability to move or take better positions.
If it makes you feel any better, the home owner in reality gets practically none of the money. Since everybody gets the deduction it just causes everyone to have to bid that much more in order to be the highest offer. And the higher prices don't really spur new home construction to compensate as you might expect, because the areas with high demand are largely urban areas with minimal available undeveloped land and zoning regulations that often prohibit the construction of higher density housing that would relieve pricing pressure. The result is that the big winners are banks, which end up making larger loans and collecting that much more government-subsidized interest.
I feel much better now.
Also, I don't see why we as a society should want to subsidize loans that take 30 years to pay off, which are most used by the relatively well off anyways. It effectively enslaves people, or at least radically reduces the space for choice and entrepreneurial activity. Similar thing happens with student loans.
[1] This even includes, partially, rental prices. If the market rate for a dwelling that's to be rented is driven higher, those costs are passed on in large part to the renter, especially in areas where housing elasticity is low (i.e. it's relatively difficult to add more units or houses e.g. SF, NYC). It's so bad that I really have a hard time figuring out who wins from the deduction. Except for the banks, of course.
It's really pretty much just the banks. You get some other movement around the edges though. For example, it promotes urban sprawl, because the higher home prices make more new home construction in the suburbs cost effective, which can be to the benefit of construction companies. And people who move from areas with higher housing prices to areas with lower housing prices benefit to the detriment of those who do the opposite, because the windfall they get when they sell their home is larger than it would be otherwise -- which again promotes urban sprawl, because it increases the financial incentive for existing urbanites to move to the suburbs, and creates a similar effect for renters because higher real estate prices mean higher rents but the renters don't get the deduction so they have to move farther away from the cities to find affordable rental properties.
The money that banks lend doesn't actually exist.
When Alice takes out a mortgage in order to buy a house from Bob, the bank doesn't go into its vault and find a bundle of cash and pull it out to give it to Bob. They just fiddle some bits in their computers so that it says they now owe Bob $500,000 (i.e. Bob now has $500,000 in his checking account) and Alice owes them $500,000 (i.e. they own Alice's mortgage for $500,000), and the two numbers cancel out which makes the accountants happy.
The bank is not required to actually have the $500,000, all they have to have is enough cash to satisfy the depositors who actually want to withdraw their funds as physical money, which is hardly anybody. (In reality there are a bunch of complicated rules about how much money banks have to have possession of in comparison to how many deposits they hold, but suffice it to say the amount is a small fraction of the total.)
And if Alice and Bob have different banks then the same thing happens except that now two banks fiddle bits in their computers so that the computers also record that one bank owes the other bank money in much the same way, which generally gets canceled out almost immediately when some other Alice and Bob engage in a different real estate transaction where the seller's bank and the buyer's bank are reversed.
>Sure they get a cut through interest rate differentials and origination fees, but most mortgages get purchased by investors.
Now you're talking about entirely different investors who invest in mortgage derivatives. But it isn't clear that they benefit from the interest rate subsidy. There is no obvious reason why the originating bank couldn't just increase the price of the mortgage by the value of the interest rate subsidy when selling it. Moreover, the purchasers of mortgages are often just other banks anyway.
Why should they have both, at the expense of others?
The mortgage tax deduction provides a huge amount of what turns out to be disposable income for the middle and lower-middle class. Take that away, and the ripples in the economy would be massive. Similarly, all current house prices would be trimmed by at least 20%, and most likely more than that due to how the tax deduction is able to help with principal payments. If we have another 20% trim of house prices across the board, you're looking at -- at the very least -- a return of the great recession. As mortgage rates are already at their lowest point, there's not much further down they can go to compensate for the sudden lack of demand that will occur.
Spending money gone. House price chopped in half, sending more people underwater. Mortgage interest rates nowhere to go. That's a trifecta of disaster.
When I've had a mortgage, I've never taken the standard deduction. When I've not had a mortgage, I've never itemized.
It's welfare for the middle class, by another name. It ain't going away.
It should be a "shelter is a basic human need" deduction.
First - property taxes, depending on the state, are fairly high. In my case, this largely offsets the mortgage deduction - though not completely (maybe 75%). People talk about how the mortgage deduction is welfare for the middle class (and up), but there are also a lot of heavy taxes involved in owning property.
Second - there's a difference between getting rid of a bad policy and never implementing it. If the mortgage deduction were a new proposal, I'd be opposed to it. Here's the problem - the government decided to "encourage" home ownership with a big deduction. New buyers factored it into what they could afford, and are now heavily dependent on it. Should the government now say "oh, on second thought, no, we shouldn't have encouraged you to do this after all, so we'll be pulling that rug out from under you now"? It would be very destructive. To me, this is a good illustration of how difficult it can be to remove a bad policy once it becomes very entrenched.
Slowly phasing it out could work. Alternatively, removing the mortgage deduction and property tax at the same time would probably reduce the impact (if taxing discourages ownership, then we'd remove the encouragement and discouragement at the same time). Problem with this is that property taxes fund local government and the mortgage deduction is a federal deduction.
That's what popped into my head when I read that post. But I lived in Cambridge, MA long enough to have a chip or two on my shoulder. :-)
Challenge to Dogma on Owning a Home http://www.nytimes.com/2013/05/10/business/homeownership-may...
1) Home ownership ties you to a geographical location. If you're renting you have more freedom to move, and increased mobility leads to less unemployment. This is the most obvious reason, but not the only one.
2) If mortgages take away a big enough portion of the paycheck, consumers have on average less money to spend in another things, and lack of demand can cripple the economy, while banks leech all the money ("extractive elites"). If rent was more prevalent, it would be easier to move to a more affordable house from time to time, driving down home prices (it would be kind of a "less captive" market; I'm not sure if that makes as much sense as I think).
3) The prevalence of mortgages gives employers a lot of leverage. If you're in serious debt, you're more likely to accept worse condition on your current job, because you can't afford to miss a payment (miss enough payments and you lose your house but keep your debt). Maybe it's a cultural thing, but this is a very real thing here in Spain. The effect is that employers can force worse conditions (especially lower salaries) on employees, which, again, creates a lack of demand because people don't have money to spend. Even worse, once you hit certain level of unemployment (which nevertheless was very high in Spain to begin with), it affects you even if you don't have a mortgage, because there is a huge amount of people willing to work for peanuts, driving salaries down for everyone and creating a feedback that reinforces the whole process.
And unfortunately we don't know what the rest of the article says. That's a pity, because we can't see how they account for the giant freaking housing bubble the US had that immediately preceded an epic crash in the economy.
That will be true even if the people who live in those homes are only renting. People need stuff, therefore stuff sells well where there are lots of people. Homeowners need just as much toilet paper as renters do.
Of course, if your business caters to people who extensively modify their homes, you might do better in a neighborhood of homeowners than in a neighborhood of renters. But the DIY home improvement industry only accounts for a small fraction of the total business opportunities that a neighborhood offers.
Home ownership accelerates in markets which are more leveraged to housing. Take Florida for example. Many people who live there work in various real estate jobs, when prices start to rise, they rise much more rapidly by percentage, and they fall much more rapidly. If the majority of a state's high paying jobs are in real estate, more people will be jobless following boom and bust cycles. Additionally, more people will be getting raises, high commission checks etc. which leads to greater home ownership in those states.
Without knowing if the author of the paper took this in to account, the research is completely worthless. Cyclicality in finance is a constant major issue and should be examined not only systematically, but also by asset class, area etc.
Cyclicality usually explains a very great degree of issues with research.
[added] A second potential explanation is that the 3 best markets for jobs have the highest prices on houses which prevents people from buying. New York, San Fran, Boston. Obviously California would go against my previous explanation.
Given that, buying a house seems too... parochial.
Suppose we figure out how to end aging, but people continue to die at the same mortality rate as the 25-34 year old group. That's roughly 1/1000 per year.
(999/1000)^692 = 0.5
If we could nudge that mortality rate down a bit, 800 seems like a pretty good ballpark estimate.
"Overbuilding in one year leads to lack of building in subsequent years".
As building homes is a big cause of temporary job growth.
Also, I doubt long commutes lead to higher unemployment rates, as the economic pressures would step in. Companies hire to meet consumer demand. If they need workers, they'll raise wages, or open satellite offices where the workers are. They don't just stop hiring & let their production go down when they have orders.
I do have a crappy job. I could probably do better if I could afford to move away. I've considered just abandoning the property or selling it for basically nothing.
Buying sucks. As does renting. I've seriously considered van life.
Bad tenants can be a nightmare. I don't really want to risk having to deal with that drama.
Right now I'm thinking I'll just have to sell the house at a loss. Not really so bad. It won't be a tremendous loss and I have lived in 3 years. I guess in the end it would have been the same had I just rented.
Previous to this I did rent for a long time and hated that.
I really am serious about the van thing.
Unless their take of the expected rent would result in a negative cash flow for you, it seems like a better option than selling at a loss.
Did they control for other influences on labour mobility such as working couples, children, pets, race/colour and car ownership?
A web search for some sentences in the abstract returns some useful hits for the paper online. Someone else posted (after you had posted) a link to the full paper.
Here's a nice PDF. (http://www.piie.com/publications/wp/wp13-3.pdf)