The Trouble With Homeownership


This is a provocative thought from Richard Florida's Who's Your City? How the Creative Economy is Making Where to Live the Most Important Decision of Your Life which arrived in my mail yesterday:

[T]he way we house people today seems a bit out of sync with other demands of our highly mobile and flexible economy. The United States has long prided itself on being a nation of homeowners. We boast that more than 60 percent of Americans owns their homes. We encourage young people to save enough to buy one of their own. We provide all sorts of public incentives from tax write-offs on mortgage interest to public investments in infrastructure -- to encourage home ownership. It is, after all, the centerpiece of the American dream.

I can't help but wonder whether this dream doesn't belong to a bygone industrial era. A central element of the creative economy is its flexibility. People change jobs often. [....]

Let's put it this way. One major attraction of investing one's savings in a home rather than in a broad index fund of stocks is that you can live in your house whereas the stocks are useless. But this introduces some rigidities into the economy which make it harder for workers to leave the places where nobody wants to hire them (Ohio, Michigan, etc.) and go to the places where people are looking for more workers (Arizona, Florida). For one thing, the transaction costs involved in selling your house are much greater than what's involved in leaving a rental property. Similarly with buying a new one. But what's more, the "living in your retirement fund" duality comes into play.

If you're considering leaving Michigan because it's economically depressed, you're not alone. As a consequence, your house probably isn't very valuable. If your stock investments tank, there's nothing you can do about it. But if your home investment tanks, you can still live there! Unless, that is, you try to move. If you'd been living in a rental and investing in the stock market, you could liquidate some of your investments to help finance the move to a more vibrant area where housing costs and employment prospects are better. But if you spent your savings on your house, then you're basically stuck.

Now obviously homeownership has some real value, but when you consider factors like that it's not clear that we should be making it a policy priority to especially subsidize this one form of asset-building over all others. In particular, if you encourage people to live in their savings, the tendency is to acquire more house than they otherwise might (instead of a house plus some stock, you buy a bigger house) which compounds the economic rigidity issues and is bad for the environment to boot.

Florida suggests that residential leases might become more like commercial ones with longer-term leases and more flexibility for tenants in terms of altering the property.