Hunting for the perfect rate of homeownership

(Bloomberg View) — Homeownership has all sorts of positive effects. According to a 2016 summingup of research on the “Social Benefits of Homeownership and Stable Housing” by National Association of Realtors economists Lawrence Yun and Nadia Evangelou, it brings:

⏩ Improvements in educational achievement;

⏩ Increased civic participation;

⏩ Physical and psychological health benefits;

⏩ Reductions in crime;

⏩ Reduced need for public assistance; and

⏩ More investment in property maintenance and improvement.

Then there’s a not-so-great thing that comes with homeownership: increased unemployment. That’s the conclusion of a newish paper by Federal Reserve Board economist Daniel Ringo, who combed through the employment and housing histories of a cohort of Americans who were in their teens or early 20s in 1979 and found that “home ownership is a significant hindrance to mobility, and owners suffer longer unemployment spells and more frequent job loss because of it.”

This presumably has negative effects on more than just the homeowners who can’t find jobs. Residential mobility enables economic adaptation and growth, and owning a home can make it harder to move. It adds friction to the economy.

Having lots of people own their homes is good for the economy and society, then, but having too many people own homes is bad. This raises an obvious question: What is the optimal homeownership rate? Someone actually asked this on the question-and-answer site Quora in January. Brookings Institution economist Karim Foda responded that there probably isn’t one, in part because there are so many different things a society might want to optimize, while Southern Methodist University economics Ph.D. student Erik Hille speculated that it was “somewhere between 63 percent and 65 percent.”

If you look through the quarterly homeownership statistics that the Census Bureau has been compiling since 1964, it’s easy enough to see where Hille is coming from.

The sharp rise in the homeownership rate that began in the mid-1990s looks like an unnatural departure from the long-term norm that led to, and was in turn corrected by, the financial crisis of 2007 and 2008. Take a longer view, though, and it’s apparent that there was nothing natural about the pre-1995 norm, either.

The 1995-2005 homeownership increase still stands out here, but it’s dwarfed by the rise from 1940 to 1960. That leap was driven by mass affluence, the automobile-enabled rise of the suburban single-family home and — most important, in my view — an array of federal policies that encouraged homeownership. In the 1990s and early 2000s, it was a mix of federal policy and what a couple of Federal Reserve Bank of San Francisco economists in 2006 innocently dubbed “innovations in the mortgage finance industry.” Those innovations didn’t work out so well! But that’s not conclusive evidence that 69.2 percent (the all-time peak reached in 2006) is an unsustainable homeownership rate.

Also, while the high U.S. ranking in a 2011 OECD study of residential mobility might seem to indicate that a low homeownership rate is conducive to mobility, that link doesn’t hold up for other nations. People move a lot in high-ownership Iceland; they don’t move much in low-ownership Germany.

I’m also not quite sure what to make of the link or lack thereof between historical homeownership and mobility trends in the U.S. Moves across state lines have been declining since 1970 and those across county lines within states since 1987. Both took an especially sharp drop after 2000.

That post-2000 drop coincided, more or less, with a big increase in the homeownership rate. But it also coincided with other things, including a recession and several years of nearly nonexistent job growth. There have been several studies in recent years attempting to explain why residential mobility has declined in the U.S., and they all focus on factors other than homeownership rates per se. Also, a 2004 study of long-run migration data by historians Patricia Kelly Hall and Steven Ruggles found that the percentage of white Americans born in other states declined over the second half of the 19th century and was flat for most of the first half of the 20th century before making a great leap between 1940 and 1970 (among blacks, the increase in migration began much earlier, in about 1900). That period of course also witnessed a great leap in the homeownership rate.

So what is the optimal homeownership rate? Well, it’s complicated — although I guess it could be somewhere between 63 percent and 65 percent.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.” For more columns from Bloomberg View, visit http://www.bloomberg.com/view. ©2018 Bloomberg L.P.