Friday, May 17, 2013

Homeownership, Unemployment and Economic Growth: Looking at the Trends

A new study* that has been receiving attention in the media claims that rises in the homeownership rate in U.S. states are correlated with subsequent sharp rises in unemployment in those states, and advances some provocative explanations to account for the correlation, including the conjecture that homeowners are more prone to support restrictive zoning that impedes business formation. The authors also find evidence that high homeownership is associated with lower labor mobility and long commutes (a point which contrasts with Randal O'Toole's argument, which I have mentioned before, that high homeownership is a product of high labor mobility).

As sympathetic as I am to arguments about the economic downsides of homeownership, I was a bit surprised by these findings, knowing that the largest increases in the homeownership rate during the period the authors examined, 1950-2010, occurred in the southern states, and that these states, I believed, also experienced the most rapid economic growth during that same period.  The study does not examine or even mention state income, so I decided to chart income growth in 49 states (excluding Alaska) and Washington D.C.

I have posted the full results here, but below is shown the top and bottom ten performing states over the 1950-2010 period, using household median income (figures are in 2010 dollars):

This is about what one might expect -- the Southern states, starting from a very low baseline, did very well during these six decades, while the rust belt states stagnated. Since we are talking about housing, though, what happens if we take into account the change in housing values, using these values to estimate the cost of housing in each state?

Discounting incomes by the cost of housing (based on the annualized expense of a 30-year mortgage at 6% interest, with 20% down**) gives the following results:

The Southern states again dominate the best performing list, with Maryland dropping out (note that Mississippi was the only state of all 50 examined where housing grew more affordable during the period examined relative to income).  Due to tremendous increases in housing prices, however, several states have moved far down the list, including New York and California.  Oregon and Montana are unusual in that housing prices increased substantially despite poor wage growth.

Finally, I correlated all the information I compiled plus the change in homeownership rates over 1950-2010 (showing correlation coefficients):

The chart shows that increases in income are strongly associated with increases in homeownership.  This compares to the weaker correlation found in the study between unemployment and homeownership over the same period (an R squared value of .108 as compared to .280: see Figure 2 on page 17). More surprising is the relatively low correlation between change in income and change in housing value: of the top ten states for housing cost growth, only two (Maryland and Virginia) were also on the list for top income growth.  For comparison, although North Dakota, Utah and California each experienced income growth of 88%, home prices rose 189%, 294% and 483% respectively. 

I didn't plot unemployment change over this period, as I'm not sure that such a volatile statistic is all that useful when measured at only two points in time. In any event, even a casual glance at unemployment rates during the recession shows that states that had the lowest levels of homeownership experienced some of the highest unemployment levels (notably California, Oregon, Nevada and New York), and have also had some of the highest levels of domestic outmigration, perhaps due to the very high housing costs that have suppressed homeownership rates in the first place.

Although none of this alters the patterns carefully discerned by the authors, I think it does at least point to the complexity of the homeownership phenomenon, which is affected by numerous economic, demographic and political factors, and which benefits from being studied in the broadest possible context so as to avoid placing too much importance on any particular correlation.

*David G. Blanchflower and Andrew J. Oswald, Does High Home-Ownership Impair the Labor Market?
*Rates were of course lower than this in 2010, but 6% is a rough long-term average for the past two decades, and in any event mortgage rates were comparable in 1950 (4.5%) and 2010 (4.7%).