James Pethokoukis writes:
Ceteris paribus, perhaps. But ceteris is seldom paribus, and it is certainly dangerous to paint with a broad brush. What is the relevant market? Both housing markets and labor markets are regional to a very large extent. Different markets are linked together in complex ways. Examples abound of areas where home ownership is high and the natural rate of unemployment is low and vice versa.
The real problem today, of course, is a lack of liquidity. People can own homes and still be mobile if a house can be sold in a reasonable amount of time. It's not the rate of home ownership that matters so much as the ability of individuals to enter and exit.
Right now, exit from the housing market is more costly than usual. As a result, people are likely to be less mobile and the natural unemployment rate may very well rise.
However, Pethokoukis and Feroli are only telling half of the story. Policies designed to keep people in their homes may increase the unemployment rate, but only to the extent that such policies make voluntary exit from the market more difficult or costly. Policies designed to keep people who are still employed (and likely to remain employed) in their homes with a minor modification to the loans are not going to have much of an effect on the natural rate of unemployment.
On the flip side, policies that allow people to voluntarily exit without any cost or penalty at all do pose a moral hazard problem. I can imagine some creative yet politically and practically unrealistic policies to try to address this and get the incentives right, but I'm not confident that what we are going to get is going to get the incentives right.
But the point is that this is not an insoluble problem. Furthermore, don't fall for the claim that home ownership is the problem.
There is an economic downside to trying to keep people in their homes, even if underwater. Mike Feroli over at JPMorgan points out the Osward Hypothesis: "Higher homeownership rates increase the natural unemployment rate because it reduces geographical mobility and the ability to move someplace else to find a job."
Ceteris paribus, perhaps. But ceteris is seldom paribus, and it is certainly dangerous to paint with a broad brush. What is the relevant market? Both housing markets and labor markets are regional to a very large extent. Different markets are linked together in complex ways. Examples abound of areas where home ownership is high and the natural rate of unemployment is low and vice versa.
The real problem today, of course, is a lack of liquidity. People can own homes and still be mobile if a house can be sold in a reasonable amount of time. It's not the rate of home ownership that matters so much as the ability of individuals to enter and exit.
Right now, exit from the housing market is more costly than usual. As a result, people are likely to be less mobile and the natural unemployment rate may very well rise.
However, Pethokoukis and Feroli are only telling half of the story. Policies designed to keep people in their homes may increase the unemployment rate, but only to the extent that such policies make voluntary exit from the market more difficult or costly. Policies designed to keep people who are still employed (and likely to remain employed) in their homes with a minor modification to the loans are not going to have much of an effect on the natural rate of unemployment.
On the flip side, policies that allow people to voluntarily exit without any cost or penalty at all do pose a moral hazard problem. I can imagine some creative yet politically and practically unrealistic policies to try to address this and get the incentives right, but I'm not confident that what we are going to get is going to get the incentives right.
But the point is that this is not an insoluble problem. Furthermore, don't fall for the claim that home ownership is the problem.
