A Blog by Jonathan Low


Jun 23, 2012

Eternal Verities - or Maybe Not: Homeownership Means Little to Economic Growth

Towards the end of his life, Winston Churchill, reflecting on his extraordinary experiences said, "I am an old man and have known a great many troubles, but most of them never happened."

His point was that much of what we learn in retrospect throws into doubt many of those supposed truths by which we guide ourselves.

So it may prove to be with homeownership. From the very first encounter between Europeans and Native Americans, much of what governed the destiny of what is now the US was about real estate. And deals related to it. That legacy endures.

Homeownership has always been a key component of the American Dream. The founding of new colonies, settling of the frontier and expansion into the suburbs since the end of WWII has fundamentally been about land and a home of one's own. The impetus was that in Europe most land was owned by royalty, nobility or the church. Many were not allowed to own land and even those who could were usually unable to afford it.

Ownership has, therefore, achieved iconic status in the contemplation of self-worth. But recent events, sparked by the financial crisis, have challenged the basis for that belief. Aside from aspiration and desire, the urge to own was driven by a bedrock conviction that real estate retained its value over time. It was the ultimate good investment. The net worth of most American families was centered on the family home. Alas, that all appears to be untrue. Analysis of real estate values over lengthy periods of time suggest that the return on residential real estate from the late 19th to late 20th centuries was zero.

Additional research implies that real estate compulsion may have diverted investment from more productive elements of the economy and that we are suffering the results of that misdirected investment now. A concentration on road networks to bolster suburban development values and even delayed infrastructure investments continue this pattern. The implication is that rather than waiting for the housing market to pick up, policy makers' attention should be turning to more productive uses of the public assets still available in a resource constrained world. JL

Richard Florida comments in The Atlantic:
Homeownership has long been a crucial pillar of the American Dream. For the better part of a century we’ve believed that building and buying homes is synonymous not only with the "good life" but with a productive and prosperous economy. The number of housing sales and starts is a commonly used barometer of economic health. The president, his economic advisers, and countless economists and business analysts continue to believe that economic recovery turns on the recovery of the housing market.

But with the collapse of the housing bubble so bound up with the ongoing economic crisis, a dissenting view has emerged.

Robert Shiller of Yale University documents that from "1890 to 1990, the rate of return on residential real estate was just about zero after inflation." Other studies have shown how America’s historic over-investment in housing has distorted its economy, leading to under-investment in technology and skills. Or as Nobel prize-winning Columbia University economist Edmund Phelps bluntly states it: "To recover and grow again, America needs to get over its 'house passion.'"

All of this prompts a simple empirical question: To what degree is homeownership associated with the economic growth of American cities and metros? If homeownership really matters to economic development, then metros with higher rates of it should also have higher levels of income, productivity, innovation, and other good economic indicators.

To get at this I enlisted the help of my Martin Prosperity Institute colleague Charlotta Mellander. We looked at the statistical associations between the rates of homeownership and key economic development indicators like income, wages, productivity, innovation, and human capital across America's 350 or so metro areas. As usual, I point out that correlation does not equal causation; other factors we have not considered can complicate the picture.

Still, our findings seem to undercut the conventional wisdom that homeownership and economic development go together.

The economic growth and development of cities and regions is generally thought to be driven by three key factors: innovation, human capital, and productivity. Homeownership, it turns out, is not related to any of them.

Take innovation and high-tech industry. Homeownership bears little relation to either, being weakly negatively associated with the concentration of high-tech industry (-.20) and not associated at all with innovation (measured as the rate of patenting).

Or consider the percentage of college graduates or share of highly-skilled knowledge/creative jobs. Again, nothing. The arrow in fact points in the wrong direction. Homeownership is weakly negatively correlated with both the share of college grads (-.27), and with the creative class share of the labor force (-.30).

What about productivity? Once again, no connection to homeownership. Homeownership is weakly negatively associated with economic output per capita (-.19).

It is true that some metros like Bridgeport and Hartford, Connecticut, Minneapolis-St. Paul, and Charlotte combine relatively high-rates of homeownership with high productivity. But these are the proverbial outliers.

Most metros with high levels of homeownership have relatively low rates of productivity. Indeed, large metros like New York, Los Angeles, and San Francisco combine relatively high output with relatively low levels of homeownership. The same is true in Silicon Valley: despite the fact that many continue to think of it as a "nerdistan," the San Jose metro provides yet another example of high productivity alongside low levels of homeownership.

The second chart plots the association between homeownership and wages, again across all U.S. metros. The pattern is even more striking. Higher levels of homeownership are mostly associated with lower wages.

There are just a few exceptions to this pattern: Hartford and Bridgeport, Connecticut; Trenton-Ewing, New Jersey; and greater Washington, D.C., where relatively high rates of homeownership coincide with above average wages. The highest wage metro in the country, San Jose, along with other high wage metros, San Francisco, Boston, and New York, have low rates of homeownership.

It used to be that homeownership signaled and led to economic growth. But that relationship was tied to the industrial era, when building and buying more homes primed the pump of America’s great assembly-lines, increasing demand for cars, appliances, televisions, and all manner of consumer durables. Those days are gone. The United States is a now knowledge and service economy; less than ten percent of Americans work in some form of manufacturing and just 6.5 percent are engaged in actually producing things. The stuff Americans buy is largely made offshore.

Instead of leading to economic development, higher rates of homeownership today are associated with lower levels of it. Homeownership is either not correlated or negatively correlated with the big drivers of economic development.

Writing recently in the Wall Street Journal, Dan Gross notes the shift in this country toward a "rentership society." But this is not to say that the U.S. is destined to become a "nation of renters." The issue is one of balance. The rate of homeownership in America hit an all-time high of near 70 percent right before the crisis and has since dropped back to roughly 65 percent today. The Urban Land Institute projects that it will drop back to the low 60 percent range over the next decade or so. The rate of home ownership ranges from the mid-50s to low 60s in many of the most highly productive, innovative metros like San Jose, San Francisco, New York and Los Angeles. Of course some regions, like greater Washington, D.C., can support higher rates.

A homeownership rate of between 55 and 60 percent seems to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread homeownership is no longer the key to a thriving economy.


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