Tuesday, January 14, 2014

Did home ownership made things worse in the Great Recession?

I have complained several times already that house ownership should not be encouraged by public authorities, mainly because it prevents diversification of risk by households and because there is slim evidence at best that home owners are happier and better contributors to society. It also quite obvious that high ownership rates have contributed to make the last recession worse in the United States. A recent trio of papers studies this last point.

Silvio Rendon and Núria Quella show that higher homeownership rates fed by easy financing lead to higher unemployment rates. This is because homeowners have higher reservation wages through a wealth effect. They find that in the US this has increased the unemployment rate by an incredible 6 percentage points. You may also want to add to this that homeowners are less willing to move for a new job, further increasing the unemployment rate, something the model does not capture.

Ahmet Ali Taṣkin and Firat Yaman look at unemployment duration in the US and find that renter stay unemployed the shortest and homeowners the longest, especially those who do not carry mortgages. Following this result, facilitating home financing would lengthen a little unemployment spells and increase the unemployment rate, under the hypothesis that job losing rates are unaffected.

Stijn Baert, Freddy Heylen and Daan Isebaert show that the unemployment spell length depends on the housing tenure situation in Belgium. The homeowners with mortgages exit the fastest, those without mortgages the slowest and renters lie in between. Easier home financing would thus reduce the unemployment rate here, again assuming it does not affect the rate at which people lose jobs. Keep in mind that Belgium is unique in that unemployment insurance benefits can last forever.

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