Quick Critique of New York Times article “Challenge to Wisdom of Owning Home”

By Lawrence Yun and Ken Fears

• The New York Times reviewed a new research paper by authors from Dartmouth and the University of Warwick in England that implies a rise in the homeownership rate is bad for the economy because fast rising homeownership was associated with much higher unemployment rate. The paper gave examples of several southern states with high unemployment rates as evidence.
• Economic vitality should be assessed not by the unemployment rate but by job growth. A state may have a very low unemployment rate yet have no job growth. What is needed for economic and income growth, in short an improving standard of living, is job growth – the variable this critique focuses on.
• The paper cites California and Wisconsin as good states with no increase in homeownership and a low state unemployment rate. Georgia and South Carolina were examples used as bad states with rising homeownership and a high state unemployment rate.
• The paper used 2010 unemployment rates to compare. But 2010 may not be the best choice of year, as it marks the deep depths of the Great Recession. A dynamic economy like that of the United States constantly undergoes a “creative destruction” that is critical to long-run faster economic growth and states that tend to grow fast could also be vulnerable to bigger short-term setbacks.
• If using the year 2007, before the economic downturn, as the end point, and using payroll growth (not the unemployment rate) for comparisons, then Georgia and South Carolina are shown to easily outperform California and Wisconsin (see table below).
• The Civil Rights Act passed in 1964. The southern states' job market conditions must be taken into consideration with this monumental legislation. Therefore, the start date for our job growth is 1964 (see table below).
• Our quick analysis shows a clear superior economic performance by Georgia and South Carolina over California and Wisconsin. A choice of different start and end years may have yielded different conclusions. At the same time, we should not automatically assume other time periods used, such as the ones implied in the NYT article, as infallible.
• Interest rates and mortgages rates vary with the business cycle. Historically, housing has led the United States out of recessions because of the low borrowing costs at the end of a recession. As borrowing costs rise, business activity is choked off as is housing consumption, the former having a more direct link to employment. Thus, housing consumption could be acting as an instrument for borrowing costs and the fluctuations in employment could be ascribed to it.
• The authors do not explore variation within the labor markets across states and time. For instance, certain regions experienced change in the industries driving their economies as the South experienced a sharp increase in skilled manufacturing and financial services since 1980. The regional observation might point to differences in patterns of economic development.
• The authors note that their working paper “makes a simple statistical contribution and discusses possible mechanisms. The detailed nature of any housing-labor externality remains poorly understood.” Furthermore, the structure of their analysis, “is potentially a weakness and means that some underlying omitted variable, or causal force, might be responsible for the link between,” the homeownership and subsequent changes in unemployment.
• Finally, it is almost certain that by the time of next Congressional Reapportionment Georgia and South Carolina will have gained a seat or two while California and Wisconsin will have lost a seat or two. That is a direct consequence of the state’s ability to draw new people because of better economic conditions. Rising homeownership rates in southern states look to have been a great benefit to the states' economies, exactly contrary to the assertion made by New York Times.