Before the housing market in the United States went into convulsions, you heard a lot of talk about the positive "externalities" of home ownership. The Bush administration made something of a fetish of the idea, saying its goal was to create an ownership society.
The best-known dissenter was the British economist Andrew Oswald. As early as 1996, Oswald was producing papers that forcefully argued that home ownership causes unemployment. The effect Oswald claimed to have discovered was strong: Every 5 percent rise in home ownership resulted in a 1 percent rise in unemployment. Oswald's original paper set off a cascade of others that largely confirmed his results.
Oswald is out with a new study, co-authored with David Blanchflower, that sheds more light on the link between unemployment and home ownership rates:
We explore the hypothesis that high home-ownership damages the labor market. Our results are relevant to, and may be worrying for, a range of policy-makers and researchers. We find that rises in the home-ownership rate in a U.S. state are a precursor to eventual sharp rises in unemployment in that state. The elasticity exceeds unity: a doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate. What mechanism might explain this? We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. The evidence suggests, instead, that the housing market can produce negative 'externalities' upon the labor market. The time lags are long. That gradualness may explain why these important patterns are so little-known.
If you don't have the time or inclination to read the paper, you can peruse an op-ed Blanchflower wrote about it for the Independent.
There's been a lot of head-scratching over this finding. The part about lower levels of labor mobility and greater commuting times is pretty straightforward. But fewer new businesses? Why would home ownership discourage businesses from starting up? Oswald and Blanchflower admit that they don't have a complete answer for this but speculate that it could have to do with zoning restrictions.
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Here's my guess: It's about misallocated capital. Rising levels of home ownership typically arise from a policy push intended to put more people into homes they own or incidentally accomplishing the same thing by making mortgages more affordable. This means we get a housing boom—and eventually a bust. But the overinvestment in housing is just the visible result. What goes unnoticed is that other areas of the economy wind up starved for capital. That is, policies that make home ownership more affordable crowd out other investments.
In short, what Oswald and Blanchflower are seeing is a version of what the Austrian economists like to call "malinvestment." The push into home ownership means that the many moving parts of the economy become de-sychronized. The unemployment that eventually results from this is a sign of an economy that has had its signals so scrambled that it cannot figure out what do to with available resources in the form of people without jobs.
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There's an important credit market angle here, a lesson for bankers. A study by the Federal Reserve Bank of Atlanta in 2010 showed that a 1 percent increase in the unemployment rate boosts the chances of a mortgage becoming seriously delinquent by 10 to 20 percent. Connecting the dots, this means that an area experiencing rising home ownership will over time become a hot spot for mortgage defaults. Mortgage bankers should take this in account when calculating rates, including a risk premium in areas with rising home ownership.
By CNBC's John Carney. Follow me on Twitter @Carney