Richard Florida

Homeownership means little

Senior Editor, The Atlantic; Director, Martin Prosperity Institute, University of Toronto, Jun 20, 12.

Homeownership has long been a crucial pillar of the American Dream. For the better part of a century we’ve believed that building and buying homes is synonymous not only with the “good life” but with a productive and prosperous economy. The number of housing sales and starts is a commonly used barometer of economic health. The president, his economic advisers, and countless economists and business analysts continue to believe that economic recovery turns on the recovery of the housing market.

But with the collapse of the housing bubble so bound up with the ongoing economic crisis, a dissenting view has emerged.

Robert Shiller of Yale University documents that from “1890 to 1990, the rate of return on residential real estate was just about zero after inflation.” Other studies have shown how America’s historic over-investment in housing has distorted its economy, leading to under-investment in technology and skills. Or as Nobel prize-winning Columbia University economist Edmund Phelps bluntly states it: “To recover and grow again, America needs to get over its ‘house passion.’”

All of this prompts a simple empirical question: To what degree is homeownership associated with the economic growth of American cities and metros? If homeownership really matters to economic development, then metros with higher rates of it should also have higher levels of income, productivity, innovation, and other good economic indicators.

To get at this I enlisted the help of my Martin Prosperity Institute colleague Charlotta Mellander. We looked at the statistical associations between the rates of homeownership and key economic development indicators like income, wages, productivity, innovation, and human capital across America’s 350 or so metro areas. As usual, I point out that correlation does not equal causation; other factors we have not considered can complicate the picture.

Still, our findings seem to undercut the conventional wisdom that homeownership and economic development go together.

The economic growth and development of cities and regions is generally thought to be driven by three key factors: innovation, human capital, and productivity. Homeownership, it turns out, is not related to any of them.

Take innovation and high-tech industry. Homeownership bears little relation to either, being weakly negatively associated with the concentration of high-tech industry (-.20) and not associated at all with innovation (measured as the rate of patenting).

Or consider the percentage of college graduates or share of highly-skilled knowledge/creative jobs. Again, nothing. The arrow in fact points in the wrong direction. Homeownership is weakly negatively correlated with both the share of college grads (-.27), and with the creative class share of the labor force (-.30).

What about productivity? Once again, no connection to homeownership. Homeownership is weakly negatively associated with economic output per capita (-.19).

(Click here for a larger image)

The chart above by Michelle Hopgood of the Martin Prosperity Institute helps put the matter in perspective, graphing the relationship between homeownership and per capita economic output across all U.S. metros. The pattern is frankly all over the map.

It is true that some metros like Bridgeport and Hartford, Connecticut, Minneapolis-St. Paul, and Charlotte combine relatively high-rates of homeownership with high productivity. But these are the proverbial outliers.

Most metros with high levels of homeownership have relatively low rates of productivity. Indeed, large metros like New York, Los Angeles, and San Francisco combine relatively high output with relatively low levels of homeownership. The same is true in Silicon Valley: despite the fact that many continue to think of it as a “nerdistan,” the San Jose metro provides yet another example of high productivity alongside low levels of homeownership.

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