Friday, August 1, 2014

The Relationship Between Home Ownership and Unemployment

A study by David Blanchflower and Andrew Oswald at Chatham House looks at the interesting connection between home ownership and unemployment, a relationship that is quite strong.

Home ownership has been a key part of the American Dream for generations and has long been promoted by governments, particularly Washington.  The National Home Ownership Strategy  began in  1994 when the Clinton Administration undertook a plan to promote homeownership as you can see in this excerpt from a May 2, 1995 Presidential message:

"For millions of America's working families throughout our history, owning a home has come to symbolize the realization of the American Dream. Yet sadly, in the 1980s, it became much harder for many young families to buy their first home, and our national homeownership rate declined for the first time in forty-six years. Our Administration is determined to reverse this trend, and we are committed to ensuring that working families can once again discover the joys of owning a home.  

This past year, I directed HUD Secretary Henry G. Cisneros to work with leaders in the housing industry, with nonprofit organizations, and with leaders at every level of government to develop a plan to boost homeownership in America to an all-time high by the end of this century."

This promotion of home ownership continued under the Bush Administration as the Ownership Society which provided downpayment assistance to approximately 40,000 low-income families under the American Dream Downpayment Initiative among others.

Here is a graph from FRED showing the level of home ownership in the United States from the years 1984 to the present:


The programs implemented by Washington appear to have been quite successful at raising the level of home ownership; in 1994, the home ownership rate was 64 percent, rising to a maximum of 69 percent in 2004.  Since then, it has dropped to its current level of 65.1 percent.  There is a very wide variation in the state level of home ownership as you can see on this map for 2012:


By using the employment data for millions of Americans over three decades, the authors have been able to develop equations for the number of weeks worked, the chances that a person will be unemployed, the length of commuting times, the number of businesses and the degree of labour mobility.  

With this data, the authors have shown that there is a strong link between high levels of home ownership in a given geographical area and the high level of unemployment in that same area, a relationship that holds all the way back to the 1980s, not just during and since the Great Recession. Here is a graph showing the relationship between the rate of change in home ownership between 1950 and 2000 and the rate of change in the unemployment rate between 1950 and 2010 in U.S. states:


Using state-level unemployment data from the Merged Outgoing Rotation Groups (i.e. extracts of the Basic Monthly Data during the fourth and eighth month of the survey when weekly hours and wages are asked) of the Current Population Survey between 1985 and 2011, the authors ended up with a sample size of 1377 observations.  These observations, along with home ownership rates can be combined to create this graph which shows the estimated change in unemployment levels associated with a 1 percent change in home ownership with the Lags 1 to 5 showing the response of unemployment to a change in home ownership rates in each of the previous five years:


As shown in Lag 1, after just one year, an increase in home ownership has a small but immediate impact on unemployment of about 0.1 percent.  Because this small change in year 1 impacts unemployment in future years, the long term impact over 30 years is much larger, reaching about 1.7 percent.  When we take into account the changes in home ownership in each of the preceding five years (Lags 1 to 5), the impact is much larger; a 1 percent increase in home ownership leads to a 2.2 percent increase in unemployment.

The authors have found that high levels of home ownership in U.S. states is related to:

1.) lower mobility of labour.
2.) longer and more expensive commutes.
3.) fewer new firms as residential areas adopt the NIMBY philosophy.

Interestingly, the authors show that the same relationship between the level of home ownership and unemployment also holds for European nations and other OECD nations.


The authors conclude that policies that promote home ownership have resulted in an impairment of the labour market over an extended period of time.  They suggest that the reason that this pattern has received relatively little attention is that the time lag between a rise in the level of home ownership and the time that the labour market is impacted is relatively long, leading to relatively little research on the subject.  The conclusions of this research is particularly important for policy-makers, both government and in the world's central banks who seem at a bit of a loss when it comes to understanding why unemployment has remained at elevated levels since the end of the Great Recession.

4 comments:

  1. So the solution to high unemployment is to make it more difficult for people to own homes?

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    1. Without government help, many people at the margins could not have afforded to buy a home. These are the "home owners" that never should have been home owners.

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  2. "With this data, the authors have shown that there is a strong link between high levels of home ownership in a given geographical area and the high level of unemployment in that same area"

    No, an R squared value of 0.1 does not imply a strong link...It actually implies there is very little correlation between the two variables.

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    1. Well put!! Strange that such an obvious was not noted. Perhaps the matter is being researched. I will come back later.

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