Rental housing grows the economy

June 29, 2010 | Apartments, Cities, Demographics, Economic development, Housing, Primer posts, Rental, Speculation, Tenure, Theory, US News

By: David A. Smith

 

Want to grow your metropolitan economy?  Create a large and diverse supply of quality rental housing.

 

Want to impede economic competitiveness?  Raise the homeownership level.

 

confused_otter

 

Unexpectedly, I find myself completely agreeing with Richard Florida, author if The Rise of the Creative Class, in his recent Wall Street Journal op-ed:

 

Homeownership Is Overrated

 

richard_florida

Who knew AHI would agree with me?

 

We are heading toward a global flexi-force, where a relatively large population group flexes in and our of the workforce in response to changing economic demands.

 

Brave_and_bold_plastic_man

Dude, where’s my job?

 

Today’s economy requires a more mobile workforce.

 

Labor mobility is economic power.

 

Several generations of Americans have seen homeownership as a birthright and a necessity.

 

Not just Americans: the British, the French, most of the developed world think homeownership is a birthright.  (Germany is the exception, by virtue of their system which makes long-term rental equivalent to homeownership in everything but appreciation potential.)

 

We love dessert, but it’s basic foods that make us strong.

 

We love vacations, but it’s work that gives us choices, makes us happy, and gives life meaning.

 

We love homeownership, but it’s quality rental that makes an economy grow.

 

say_huh

Run that by me again

 

We take it for granted that owning your home is a good thing:

 

Yes, we do – and for many people, those who want to be rooted to a place, it clearly is. 

 

roots_04

I ain’t movin’

 

Said another way, if you own your home, and your home has embedded equity, then you have financial and mobility optionality, and both of those are hugely valuable.

 

[1] It goes along with higher incomes.

[2] It causes people to be more diligent, hard-working and productive.

[3] It leads to [3a] stable families, [3b] stable communities, and [3c] higher levels of happiness and well-being.

 

Generally speaking, homeownership does all of those things.  Yet homeownership is correlated with age – we buy homes at thirty, sell them at sixty-five – that correlates with our most productive years. 

 

Homeownership certainly contributed significantly to the golden era of American prosperity that began after World War II and continued into the 1990s.

 

levittown_aerial

Come home from the war, get a bride, buy a house

 

That golden era also corresponded with a rapidly expanding economy dominated by an America that was the only nation not to be devastated by World War II.  As the rest of the world either rebuilt its economies (Europe, Japan) or grew them into global competitiveness (Brazil, India, China), America’s economic exceptionalism has narrowed.

 

Today’s idea-driven economy requires a more mobile work force that can seize opportunities wherever and whenever they arise.

 

Truth be told, it was ever thus.

 

Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery.

 

Let’s unpack that conditional (‘may’):

 

1. A home is a big capital asset.

2. Buying or selling a home has high transaction costs.

3. A home sells slowly relative to other large assets.

 

I can sell $1,000,000 worth of stock in thirty seconds, for transaction costs equal to 0.01% or less of the asset price, with price certainty and transparency throughout (because stocks are publicly quoted).  To sell a $1,000,000 home will take me roughly 250,000 times as long (90 days versus 30 seconds) with transaction costs 450 times as great (perhaps 4.5% of the asset price), and with price uncertainty and execution uncertainty throughout.

 

etrade

Wouldn’t one-click home selling be fun?

 

Those differences in speed, cost, and certainty add up to a powerful mobility inhibitor.

 

Thus the common-sense exposition of theory.  Now for the data.

 

data_as_holmes

In the future, blog data will be written by machines

 

My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors. As we expected, the rates of homeownership are greatest where housing prices are lowest.

 

Like any other species, rental apartments tend to flourish when they have an ecosystemic niche.  If prices are low and houses are easy to purchase, there’s precious little demand for high-quality apartments.  

 

But cities with high levels of homeownership—in the range of 75%, like Detroit, St. Louis and Pittsburgh—had on average considerably lower levels of economic activity and much lower wages and incomes.  

 

Here the logical ice gets thinner.

 

Far too many people in economically distressed communities are trapped in homes they can’t sell, unable to move on to new centers of opportunity.

 

This correlation is globular, not granular – and it’s a snapshot in time with the causation possibly reversed.  Detroit isn’t economically weak because it built high levels of homeownership; it has high levels of homeownership because it’s economically weak and house prices are low.  (Of course, if those households didn’t own homes, perhaps they would have moved elsewhere in America, pursuing jobs.)

 

The cities and regions with the lowest levels of homeownership—in the range of 55% to 60% like LA, New York, San Francisco and Boulder—had healthier economies and higher incomes.

 

boulder_renters

Population distribution, renters in Boulder

 

These cities also have universities, and universities attract smart young people, who become early renters.

 

Boston too.

 

gates_russell

“Me and that other Bill both got honorary degrees …”

 

Now, we can get this correlation in a completely different cause-and-effect direction:

 

Strong economy implies

Higher incomes implies

High house prices implies

Most people can’t afford homes

 

In short, higher income levels drive up housing prices, putting homeownership beyond others’ means.

 

 jimmy_piersall

Sometimes you just can’t resist doing things backwards

 

To that economic pressure, add the phase delay of development – two to four years, further protracted by the global capital crunch – and it’s easy to see homeownership shortages as the output of economic activity, not its driver.

 

Still … the correlation is a good one.  Then there’s this:

 

They also had more highly skilled and professional work forces.

 

Who’s most likely to move from one city to another?  People going to where they can earn more money.  Younger people. 

 

A greater percentage of their residents are younger and more transient; many of them prefer to rent.

 

Yes.

 

young_renters

Here today, gone tomorrow?

 

This is the groundswell of urbanization globally, and it’s urbanizing America, too.

 

If so, then those mobile young workers will move to cities where they can rapidly establish themselves as earners.  In the global south, that force creates informal communities and slums (where most of the tenures are de facto rentals), and in the global north, it creates the demand for workforce housing.

 

They had more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being.

 

Even if it can’t buy you love, money correlates with happiness.

 

randy_born_again

They say that money

Can’t buy you love in this world

But it’ll get you a half-pound of cocaine

And a sixteen year-old girl

And a great big long limousine

On a hot September night

Now that may not be love … but

It’s all right!

 

randy_newman_born_again_02

 

With fewer residents locked into mortgage payments, there is a greater degree of flexibility and resilience in the face of economic shocks and downturns. Workers can downshift as needed or move to take advantage of new opportunities. When the economy rebounds, it’s easier to attract new workers to the area if there is an abundance of high-quality, affordable rental housing.

 

There’s your money paragraph.

 

The rate of homeownership in America is already starting to fall back on its own. From a high of almost 70% during the bubble years, homeownership has fallen to roughly 67%; slightly less than 39% of Americans between ages 18 and 35 own their own home, down from 43% in 2005.

 

That’s normal American equilibrium.

 

The Urban Land Institute projects that homeownership may fall to 62% over the next decade or two.

 

That would be a really low figure, and if it is reconciled with Brookings’ projections of the United Cities of America, it makes the case for building a lot of quality rental housing.

 

I’m not saying that Americans should give up on homeownership. Those who [1] plan to stay in one place, [2] have secure jobs, and [3] can afford to, should still buy homes.

 

Exactly.

 

We need only tilt the balance, reducing the current homeownership rate from our current rate of just over two-thirds to perhaps 55% or 60%, comparable to that of the most economically vibrant regions.

 

Over-extrapolation.  Just because our cities are 60% homeownership doesn’t mean everywhere should be.  For one thing, rental apartments need landlords, and being a landlord requires professionalism and scale.  This is much harder to do in rural and geographically dispersed America, and leads to pockets of dysfunctional mobile home park communities, among other challenges.  In such places, homeownership makes sense for extended families, intergenerational families, and sessile families.

 

It’s in our economic interest to help make that happen.

 

First and foremost, the Obama administration should end its ongoing measures to prop up the housing market.   The massive federal subsidies for homeownership, which totaled some $230 billion in 2009 according to the Congressional Budget Office, should be phased out, and the tax deduction for mortgage interest eliminated.

 

Easier said than done.  You really want to step on that political third rail?

 

third_rail

That hurts!

 

The next critical step is to encourage the transition to more and better rental housing.

 

Yes.

 

Multifamily housing is one of the few profitable bright spots in a ravaged housing industry.

 

Yes.

 

There are thousands upon thousands of unsold condos and foreclosed homes that can and should become rentals.

 

Maybe turn them into workforce housing, eh?

 

A “home of one’s own” has been the emblem of prosperity and stability for a very long time. The idea is rich with psychological and cultural significance, but we have come to an economic juncture where we must re-examine even our most cherished beliefs. We can begin by updating our definition of the American Dream.

 

Or said in an even more basic way, equity you can tap at will is a great thing. 

 

But if you haven’t got equity, then you shouldn’t own a home.

 

home_under_water

You don’t want one of these

 

If you want to be mobile, you shouldn’t own a home.

 

If your range of choices (upside) is greater than your risks of displacement (downside), you don’t want to own a home.

 

Through all of that, America needs more high-quality urban rentals.

 

rent_poster

Thinking property is a crime won’t get more affordable housing built

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