Home Ownership Might Still Be Good For America

Greg and Tyler have both mentioned the result by Andrew Oswald that high levels of home ownership are associated with high levels of inflation.

Now, as you all may know, the mortgage interest deduction is a perennial whipping boy for economists. Liberal economists see it as a tax give away to upper middle class owners who are more likely to itemize. Conservative economists view it as turning potential investors away from the stock market towards the less productive real estate market.

While I am sensitive to both those arguments the question remains - is more home ownership in and of itself a good thing or a bad thing for America as a whole. At first blush Oswald's results seem to suggest that it is a bad thing.

I am, however, not so sure. Home ownership exposes families to more systemic risk. That is, if the your local economy turns bad not only are you out of a job but you are stuck in a home which is decreasing in value.

On the other hand it shields people from idiosyncratic risk. That is, suppose that your town is doing well but your business just happens to do poorly this year. Well, at least you still have the house. Even if you have to tap it for equity or sell and scale down, you still get to keep whatever premium your neighborhood commands.

My thought is that the second result might be more important than the first. People are attached to their communities and buying a home helps the hedge against the risk that their personal fortunes will not match those of their neighbors. It allows them to keep their kids in the same schools even if those schools are in greater and greater demand.

All together I think home ownership decreases the risk level homeowners face and perhaps that's precisely why they face higher unemployment. They are more willing and more able to hold out for a better position. If that's the case the home ownership may be good for America after all.