This spring has been filled with disappointing economic news, but one bright spot has been the possible bottoming out of the housing market. The conventional wisdom is that a stable housing market is important not only because housing as an industry takes up a large part of the nation’s yearly output but also because the home is most Americans’ largest source of wealth. Rising home prices, or even the absence of falling home prices, would go a long way to motivate the American consumer to feel more confident.
But in a recent article, “Homeownership Means Little to Economic Growth,” in the Atlantic Cities, Richard Florida tries to poke a hole in this narrative. He writes:
Homeownership has long been a crucial pillar of the American Dream. For the better part of a century, we’ve believed that building and buying homes is synonymous not only with the “good life” but with a productive and prosperous economy. The number of housing sales and starts is a commonly used barometer of economic health. The President, his economic advisers, and countless economists and business analysts continue to believe that economic recovery turns on the recovery of the housing market.
But with the collapse of the housing bubble so bound up with the ongoing economic crisis, a dissenting view has emerged.
Florida then goes on to study “statistical associations between the rates of homeownership and key economic development indicators like income, wages, productivity, innovation and human capital across America’s 350 or so metro areas.”
He finds that cities scoring high in these indicators actually have lower homeownership rates than average. So does this mean, as Florida concludes, that “widespread homeownership is no longer key to a thriving economy”?
In short, I’d argue, no. Florida’s thesis seems to me flawed in at least two respects. First of all, the argument he sets up is a straw man from the start: despite policymakers’ focus on the housing market and past promotion of homeownership, nobody is arguing that more people owning homes actually drives GDP growth. For better or worse, Washington’s 30-year drive to increase homeownership rates grew out of a combination of the liberal desire to increase access to housing and the conservative ideal of the ownership society. Conservatives believed, as former President George W. Bush put it:
If you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country.
We now understand that Washington’s insistence on higher and higher homeownership rates was a folly that may have helped lead to the subprime-mortgage crisis. But just because U.S. political leaders put too much faith in the idea of homeownership doesn’t mean it’s a mistake for policymakers, economists and business leaders to “believe that economic recovery turns on the housing market.”
They believe that because it’s true. Since the peak of the housing bubble, Americans have watched as $7 trillion in housing wealth vanished from under their noses. More than any other factor except for high unemployment, this figure is what has led to tepid consumer demand. And without more robust consumer spending, the U.S. will not find its economic footing again. But it’s not just a matter of wealth. The housing industry is and will remain a large part of America’s yearly economic output. It’s a sector that employs millions of people across the country, and many of these jobs are the very blue collar positions that have become so rare today.
I’m also skeptical of the way Florida interprets his statistics. While it is interesting that homeownership rates are low in cities with many college graduates, high-tech jobs and high income levels, he doesn’t provide any evidence of a direct connection, let alone a causal one. For instance, he writes:
Large metros like New York, Los Angeles and San Francisco combine relatively high output with relatively low levels of homeownership. The same is true in Silicon Valley: despite the fact that many continue to think of it as a “nerdistan,” the San Jose metro provides yet another example of high productivity alongside low levels of homeownership.
But who is to say that New York, L.A. and San Francisco don’t have lower homeownership rates simply because property is more expensive? Also, couldn’t low homeownership rates in cities with a booming high-tech sector reflect the disproportionate level of young workers — who have less capacity and desire to own a home — in those industries?
It may very well be the case that homeownership rates will remain lower than they have been in the previous 30 years. The recent financial crisis has put a damper on people’s desire to invest in real estate. But to argue that a recovery in the housing market isn’t essential for a broader economic recovery just isn’t supported by the facts.