mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Monday, June 07, 2010

Correlation vs. Causation, or why home ownership isn't wrecking the economy...

I was reminded of this old blog post when I read this WSJ opinion column claiming that home ownership is overrated. While there are legitimate arguments against home ownership in certain situations, the statistics that Mr. Florida uses to try to demonstrate this are awful:

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

Besides their economy, there is something else that seems pretty obvious about those places - the cost of homes. Homes in Detroit are notoriously cheap - some have sold for as little as a dollar. LA, San Fran, and NYC, on the other hand, are notoriously expensive places to live, where closet-sized condos often go for half a million or more.

So I would argue that Detroit et al aren't economically depressed because home ownership is high, but that home ownership is high because they are economically depressed. Like any other good, houses are subject to the laws of supply and demand, and when demand goes down because the economy is tanking and supply stays stable because, well, the houses are already there, then price is going to go down, and consumption is going to go up. The opposite is true in places like NYC - demand goes up, supply stays flat, and prices go up.

Now, I'll admit that I do have a dog in this race - I own a home, and when I bought it I factored in the mortgage interest deduction that Mr. Florida wants to kill. That would hit me twice - it would raise my effective interest payments by a couple hundred bucks a month, and sharply decrease the value of my house, because buyers would no longer be factoring that interest deduction into how much they are willing to pay.

And while I do think that there are advantages to the flexibility of not owning a home - at various points, I've considered a career change or going back to school full time, but I can't since I own a house. However, there are also good things about people being stable - it may not be good for new businesses, but it's good for employers who want to retain their employees. It's also good for the stability of communities, to have homeowners who actually have a long-term stake in their communities.

I wonder if Mr. Florida thinks that lemons reduce car crashes, too.


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