On Morning Edition today, I discussed the merits of owning versus renting your home with host Steve Inskeep. The ideal of homeownership is deeply ingrained in the American psyche. For the past half century, owning a home of your own has been the veritable cornerstone of the American Dream. We more or less take it for granted that homeownership is a good thing. Homeownership, it is commonly thought, goes along with higher incomes. It causes people to be more diligent, hard-working, and productive. It leads to stable families, stable communities, and higher levels of happiness and well-being.
But, a whole slew of recent research suggests that there are considerable costs as well as benefits to owning your home. A 1998 Federal Reserve Bank of Dallas study, undertaken well before the boom and bubble, provided detailed empirical evidence of America's over-investment in housing. Yale University's Robert Shiller, the world's leading student of bubbles, housing, and otherwise, found that from "1890 to 1990, the rate of return on residential real estate was just about zero after inflation." Or as Nobel prize-winning Columbia University economist Edmund Phelps puts it: "It used to be that the business of America was business. Now the business of America is homeownership." He adds, "To recover and grow again, America needs to get over its 'house passion."' I delve into these issues in greater depth in The Great Reset.
My conversation with Inskeep got me interested in trying to better understand and explain the variation in homeownership across America and also to see to what degree these differences are tied to social and economic factors that are reshaping its economic geography. We use a simple gauge of homeownership -- the percentage of owner-occupants in a region. Our data are from the 2008 American Community Survey and cover 339 U.S. metropolitan regions.
The map (immediately above) -- prepared by the Martin Prosperity Institute's Zara Matheson -- shows the striking variation in the rate of owner-occupancy across U.S. metros. On average, roughly 68 percent of Americans who live in metro areas own their own homes. But the variation ranges from more than 80 percent (81.7 percent) on the high-end to less than half (49.3 percent) on the low end. Among large metros -- those with more than one million people -- more than seven in 10 people own their homes in Minneapolis-St. Paul (74.2 percent), Detroit (74.1 percent), St. Louis (72.9 percent), Birmingham (72.8 percent), Pittsburgh (71.7 percent), Philadelphia (70.5 percent), Louisville (70.4 percent), and Tampa (70.3 percent). On the other hand, the lowest rates of homeownership are found in Los Angeles (51.9 percent), greater New York (53.7 percent), San Diego (56.7 percent), San Francisco (57.6 percent), Las Vegas (58.9 percent), Austin (60 percent), and San Jose (60.7 percent). College towns also have relatively low rates of homeownership -- like, for example, College Station (52.1 percent), Ithaca (52.9 percent), Ames (55.9 percent), and Corvalis (56.1 percent).
But what might underlie these patterns? What factors might be associated with regional differences in homeownership? And, more importantly, in what ways does homeownership reflect the broader forces that are reshaping America's regions?
With help from Charlotta Mellander, I was able to take a reasonably close look. We performed a simple correlation analysis and ran a series of scatter-graphs between homeownership and key regional demographic and economic factors. We did this for all 300-plus U.S. metros and for the 46 large metros (again, those with more than one million people). As usual, I note that our analysis points to association between variables only. It does not imply causation, and other factors may complicate the picture. Our findings are interesting and challenge the conventional wisdom on several fronts.
First of all, homeownership is much more common where houses are cheaper. We found a negative correlation between owner-occupancy and housing prices. The correlation was -.37 for all metros and a whopping -.67 for large metros.
Even more striking perhaps is the relationship between homeownership and the level of economic development. The association here is negative. That is, more people own their own homes in places where incomes, wages, and economic output are lower. Homeownership is negatively related to economic output (which we measure as gross metropolitan product per person). The correlation is -.16 for all metros and -.28 for large metros. It is also negatively related to incomes with a correlation of -.36 for large metros. And, homeownership is negatively related to wages: The correlation is -.18 for all metros and even higher for large metros (-.35).
Smart regions have higher levels of income, economic output, and overall well-being. But homeownership is substantially lower in smart regions, whether measured by the level of human capital; the share of creative, knowledge-based, and professional occupations; or the level of technology-based industry. Homeownership is negatively related to human capital (measured as the share of metro population with a bachelor's degree or higher): the correlation being -.26 for all metros. It is also negatively related to the creative class, with a correlation of -.19 across all metros.
Homeownership rates are higher, however, in communities with a
higher percentage of traditional blue-collar working-class jobs. The
correlation between owner-occupancy and working class jobs is .36 for
Source: Techpole is for 2006, based on Census Industry Data. Definition based on Tech Pole Index from 2000, published by the Milken Institute.
The relationship between homeownership and high-tech industry is even more striking. Our measure of high-tech industry is the tech-pole index originally developed by Ross DeVol of the Milken Institute. Homeownership is significantly lower in regions with larger concentrations of high-tech industry. The correlation is -.25 for all metros and considerably higher (-.61) for large regions.
Homeownership is also significantly lower in more open and diverse regions. One measure of openness is the share of immigrants or foreign-born people. Homeownership is negatively associated with the percentage of foreign-born people: the correlation is -.45 for all metros and a whopping -.69 for large regions.
Another gauge of openness is the percentage of gay and lesbian people living in a metro. Our measure of gay populations is the gay index -- initially developed by Dan Black, Gary Gates, Seth Sanders, and Lowell Taylor -- which we updated based on more recent data. Homeownership is negatively associated with this gay index measure. The correlation is -.48 for all metros and -.56 for large metros.
Research by economist Andrew Oswald has found that homeownership is associated with higher levels of unemployment. In his research on European cities, he found that a 10 percent increase in homeownership correlated with a two percent increase in unemployment. Homeownership was a better predictor of unemployment, Oswald found, than rate of unionization or welfare benefits. Our findings are in line with his. Regions with higher levels of homeownership have also experienced worsening unemployment rates over the past year. The correlation between homeownership and the change in the unemployment rate from 2008 to 2009 is .23 for all metros.
That brings us to happiness and well-being. A study by University of Pennsylvania economist Grace Wong Bucchianeri found that after controlling for income and demographics homeowners are no happier than renters, and that homeowners reported considerably higher levels of stress. Our findings also align with hers: we find that homeownership is associated with lower levels of happiness and well-being, with a correlation of -.19 for all metros.
The varied picture of homeownership across metropolitan America reflects the deep and fundamental forces which are and have been reshaping its underlying economic geography. In a previous Atlantic article, I summarized the powerful undercurrents which have been sorting people and economic activity across U.S. regions. On the one hand, the variation in homeownership across regions reflects these forces. Homeownership is more prevalent in smaller regions with more traditional economic structures, lower levels of human capital, and lower rates of economic growth, where houses are more affordable. But it is significantly lower in more affluent knowledge- and technology-based regions where housing is considerably more pricey. These high prices, as my own research and that of University of Michigan economist David Albouy show, reflect their higher rates of productivity and higher levels of amenity.
This also has implications for where and how we want to live. If owning a home is part of your dream, it's far more likely in smaller regions with less highly charged economies. But if you wish to live in a superstar city or in a high-tech center, get ready to pay a lot more or to settle into long-term renting.
America's housing patterns not only reflect these underlying forces, they may well reinforce them. Places like Los Angeles and New York, Seattle, Silicon Valley, and Austin not only benefit from diverse, knowledge-based economies, they have housing systems which contribute to their flexibility. Lower levels of homeownership mean that fewer of their residents are locked into mortgage payments and thus can much more easily adjust to economic downturns. They can more easily downshift their housing or move to new opportunity. And with more options for rental housing, these regions can more easily attract new people -- including young people, those just starting out or starting over. Regions with higher levels of homeownership like Detroit or St. Louis have far less flexibility in adjusting to economic downturns. More of their residents are locked into their homes and are unable to relocate, whether to less expensive housing nearby or better opportunities elsewhere. These regions also have smaller rental stocks to accommodate newcomers. A region's housing market entails more than providing shelter for residents; it is a key contributing factor to its flexibility and adaptability to changing economic conditions.
Owing your own home may be a cornerstone of the American Dream, but it is no longer associated with either greater levels of regional development or higher levels of regional happiness. Too much of it may make regions less flexible and resilient in dealing with economic change.
Next up: later this week, I perform a similar analysis of renting versus owning, looking in detail at the factors associated with regional differences in the so-called housing price-to-rent ratio across the United States.