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.

Home Ownership - Is it Still a Cornerstone of American Prosperity?

Home ownership.  For decades, it has been the cornerstone of the American Dream.

During and after the Great Recession, this aspect of the American Dream became unravelled as shown here:

In 2004, the home ownership rate peaked at 69 percent, up from 64 percent the decade before.  In 2013, the home ownership dropped to its current level of 65.1 percent, a drop of 5.7 percent.  A significant part of this drop was due to the millions of American home owners who found themselves on the receiving end of a foreclosure notification.

Some parts of the United States were hit worse than others. Let's open this section by looking at a bar graph that shows the home ownership rate for all states in 2012 in order from least to greatest:

Now, let's look at some key changes to the downside.  Among the largest losing states when looking at the change in home ownership rates is Nevada where the home ownership rate dropped from 65.7 percent in both 2004 and 2006 to 56 percent in 2013, a very substantial drop of 14.8 percent: 

Note that home ownership rates in Nevada are about the same level that they were in the early 1990s.

California was hard-hit as well with the home ownership rate dropped from 60.2 percent in 2006 to 54.3 percent in 2013, a drop of 9.8 percent as shown here:

You have to go all the way back to 1991 to see home ownership levels in California that are the same as they were in 2013.

Florida was another hard-hit state with the home ownership rate dropping from 72.4 percent in both 2005 and 2006 to 66.1 percent in 2013, a drop of 8.7 percent as shown here:

Here's a look at Ohio's home ownership rate which dropped from 73.3 percent in 2005 to 67.9 percent in 2013, a drop of 7.4 percent as shown here:

This drop is at least partly related to the de-industrialization of Ohio's economy since the turn of the millennium.

In contrast, despite what we hear about residential real estate problems in Detroit and other automotive rust belt cities in Michigan, Michigan's home ownership rate has remained fairly steady since 2009, falling from 77.4 percent in 2006 to its current level of 73.9 percent (still leaving it among the highest state in the nation as measured using the home ownership metric), a drop of only 4.5 percent as shown here:

Thanks to horizontal drilling and fracking, North Dakota's economy is strong.  Since its peak home ownership rate of 71 percent in 2000, North Dakota's home ownership rate has fallen to 68 percent, a drop of only 4.2 percent as shown here:

Thanks again to the oil industry, Texas has had a relatively small readjustment in home ownership rates.  Since peaking at 66 percent in both 2006 and 2007, the state's home ownership rate dropped to 63.3 percent in 2013, a drop of only 4.1 percent as shown here:

Lastly and because it is the nation's third most populous state, here's a graph showing the relatively small change in New York's home ownership rate which dropped from 55.9 percent in both 2005 and 2007 to 53 percent in 2013, a drop of 5.2 percent:

We can quite quickly see that home ownership rates readjusted in some U.S. states far more than others since the peak of the housing market in 2006.  Those states where a real estate bubble developed and then burst (i.e. California, Nevada and Florida) saw the most significant declines in the rate of home ownership, pushing rates down to levels last seen in the 1990s.  The relaxed credit standards that were used by the mortgage industry during the first half of the 2000s were largely responsible for the ramping up of the home ownership rates, particularly among households that were "credit constrained".  

Is home ownership still the key to the American Dream that it was for generations?  A Pew Research analysis in 2012 showed that the percentage of Americans who considered home ownership to be a key requirement for being in the middle class has dropped from 70 percent in 1991 to only 45 percent in 2012 as shown on this graph: 

Interestingly, a study by Chatham House showed that states with high rates of home ownership tend to be states with high levels of unemployment as shown on this graph:

One explanation is that if workers own their home, they are less mobile when it comes to moving for work, particularly given the stubbornly weak real estate market in many parts of the nation.  

It is becoming increasingly apparent that home ownership today no longer assures the owner that they are part of the American Dream and that homeownership is not the only means to both a happy and secure financial future and a strong national economy.