Chris Berry On The Net

In this excellent article in The Atlantic, Richard Florida provides a chilling prediction of the long-term effects of the current recession. According to his analysis, those regions of the country with the highest concentrations of creative class workers will eventually emerge stronger, while those that rely heavily on manufacturing and other blue collar industries may never recover. The main focus of the article is on the changing nature of the American workforce, and how the different segments will be impacted by the downturn, but he also touches on a subject that I believe deserves far more scrutiny; that is the constraint on economic mobility imposed by home ownership.

For decades, our federal government has made a concerted effort to increase the ranks of homeowners. Our current tax policies place a punitive burden on those individuals and families who choose to rent rather than own a home. Many analysts trace the roots of our current problems directly to government policies favoring home ownership. The Community Reinvestment Act of 1977 was one of several laws passed to encourage lending in low income neighborhoods that eventually led to a relaxation of lending standards for all borrowers.

During his presidency, George W. Bush frequently spoke of the benefits of an ownership society. He saw home ownership as a key element of upward mobility, providing individuals and families the opportunity to gain a solid financial footing through equity growth. Unfortunately, the unintended consequences of our tax policies often produce the opposite effect. Many Americans today view their homes as a source of short-term revolving credit, and their mortgage balances actually increase over time. Rather than a source of wealth, the home becomes an ever increasing debt burden.

In spite of all the government programs aimed at increasing home ownership, there has never been a sufficient explanation as to why it is necessarily beneficial from a societal standpoint. Rather than promoting the accumulation of wealth, government subsidies in the form of preferential tax treatment actually encourage people to live beyond their means. We spend more on housing than we would otherwise, and thus have less to spend on other priorities. This over spending on housing is one of the key factors that led to the current crisis, and to an economy wide over investment in non-productive capital assets.

Proponents of home ownership will claim that it leads to more stable neighborhoods with higher property values, lower crime, and better schools. These people operate on the assumption that owners are more likely than renters to maintain their properties, and to take an interest in the well being of their communities. I maintain that this basic assumption is flawed. All you have to do is visit a major city where a large portion of the population are long-term renters to see that this argument does not hold water.

There is nothing magical about home ownership that turns people into responsible citizens, and the current economic downturn has provided us with plenty of evidence to demonstrate this fact. A significant number of homeowners facing foreclosure today are not in trouble because they have lost jobs or had adjustable rate mortgages. Many have simply stopped making payments because the value of their homes has declined.

Regardless of the perceived benefits of home ownership, there is no doubt that there is also a very real drawback. Owning a home during challenging economic times ties us to a particular place and limits our economic mobility. While the unemployment rate for the nation stands at 7.6%, the loss of jobs has not been evenly distributed. While no place has been entirely immune to the downturn, some areas have been much harder hit than others. In December, the unemployment rate in Detroit was 21%.

The long-term prospects for people living in the hardest hit areas are bleak. When the broader economy does recover, rust-belt cities like Detroit are likely to be passed over. Rather than being able to take advantage of opportunities elsewhere, homeowners in these areas will be chained to an economy in perpetual decline. Their only option will be to simply walk away from homes they cannot sell for any price.

Mobility of the labor force is a vital ingredient for a healthy economy. The current crisis has already led to many government reforms, and we will likely see many more before it is over. While it wouldn’t end our current problems, eliminating the massive tax preferences for homeowners would provide greater freedom of choice and mobility in the future.