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Mobility Math: More Folks Renting = Fewer Mortgages = Lower Deficit and Lower Unemployment

Indeed, it has long been U.S. government policy to encourage home buying among young adults, especially by providing favorable tax subsidies for homebuyers in the form of the famous mortgage interest deduction.
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Don't look now, but renting is in! The mobility revolution isn't only about the Internet, the iPhone and advertising (although that's a big part of it). Think for a moment about automobile transportation. Starting with ZIP Cars and now on to Uber and Lyft, we're witnessing the emergence of successful new business ventures in "just-in-time" rental transportation arrangements. Or in a less down-to-earth mode, look at the emergence of the "jet-rent" industry: as the saying goes in another advertising context, even Warren Buffett's a fan!

But the "new mobility" is contributing to an even more profound shift in consumer habits in a sector of commerce even more central to the economy than the auto or airline industries - namely, the housing market. But in this case, it's not a shiny or clever new business model that has captured the attention of millions of consumers. No, in the case of the personal home market, the first "change agent" turns out to be the Great Recession of 2007 to 2009, which itself was triggered by the home mortgage market meltdown and the financial institutions that milked it for all it as worth, and then some.

There is no need to rehash the full history of how the financial system was brought to its knees by the slicing and dicing of mortgage-backed securities to create the illusion that the repayment risk of sub-prime, floating-rate mortgages (i.e., loans that on the face of it could only be repaid if the homeowner could sell the house before the interest rate increase came due). This colossal example of a Ponzi scheme ran out of runway when the Federal Reserve's interest rate hikes, as the economy fully recovered from the "dot-com" crash at the turn of the century, jacked up mortgage rates generally and floaters in particular, and the markets for both homes and the intricate web of financial instruments based on them suddenly ran out of buyers.

The resulting economic crash, with its bailouts and bankruptcies, led to hundreds of thousand losing their jobs (and their mortgaged homes) every month, and put taxpayers on the hook for billons in loans that kept the economy from completely collapsing in another great Depression. Time, tax cuts and other economic stimulus programs, along with a highly experimental Federal Reserve zero interest rate policy and bond-buying program, has led to a modest but now quite steady general economic recovery. But the ability of millions of unemployed to find new full time work has lagged behind as many have been unable to relocate to "where the new jobs are" because they've been literally held literally captive to "underwater' mortgages for homes they cannot sell or can't just walk away from without killing their credit ratings.

Enter the solution: the rental housing market. Sell your underwater home to an investor who will either rent it back to you or to somebody else who's trying to do the same. Or if you're lucky enough to be a rising housing market because of local economic recovery, sell while you can and switch to renting because you don't want to be immobilized by a mortgage again and you'd rather have the flexibility to go where the jobs are the next time a recession hits. Or if you're a millennial stuck after college in your parents' house with student loan debt but can't find a decent-paying job in their neck of the woods, move out to where the job market craves your generation and skills, and forget about being a "first time home buyer" for a while longer and just rent.

All this adds up. While there was a strong recovery in both new and existing home sales over the past couple of years -- driven in large part by all-cash (i.e., no mortgage) investor purchasers and a strong pace of "market clearing" distressed sales - the trend definitely leveled off in the first half of 2014 due to a reduction in distressed sales as they ran their course and the difficulty of obtaining mortgages under stricter credit terms particularly for first-time homebuyers, who have tended to "prime the pump" for the housing market in the past.

Indeed, it has long been U.S. government policy to encourage home buying among young adults, especially by providing favorable tax subsidies for homebuyers in the form of the famous mortgage interest deduction and the substantial amount of forgiveness of capital gains taxes on profits from the sale of primary residences. The interest deduction was originally not a big deal when income tax was first imposed (since only about 3 percent of citizens actually owed the tax at first (circa 1910). But the rising middle class that emerged during and after World War II increased the number of taxpayers (to 30 percent and homeowners to 55 percent in 1945 up from 40 percent in 1940), and when they pushed the government for tax relief, the mortgage interest deduction was a convenient vehicle. Whether the deduction actually stimulated home ownership is highly debatable, but politicians from the Bushes through the Clintons bought that idea. Democrats liked the idea of the deduction's tax break for the middle class (even though most of its benefits go to the wealthy) and the GOP thought home ownership would convert liberals to conservatives.

What every budgetary hawk in Congress and think-tanks knows for sure, however, is that the deduction has been a major contributor to the rising national debt. As one of the largest "tax expenditures" of the federal government, it has cost the treasury up to $100 billion in revenue in some past years. But as the economy has recovered from the Great Recession that number has not picked up but has actually gone down to around $70 billion. Congress should be delighted with a $30 billion annual deficit reduction it doesn't have to vote for!

The trend away from historical growth patterns of home ownership and mortgages seems solidly established: even the Mortgage Bankers Association has forecast a fall in home sales in the US this year (the first in four years). Meanwhile, a report by the Joint Center for Housing Studies of Harvard University has found that "recent economic turmoil underscored the many advantages of renting and raised the barriers to home ownership, sparking a surge in demand that has buoyed rental markets across the country." The report shows increases since the recession in renting across all but the oldest age groups, with families with children now nearly as likely to rent as singles. In the last five years, rental vacancy rates have dropped by nearly 20 percent, and multifamily housing construction starts have more than doubled!

Could it be that the decline in the unemployment rate from over 10 percent to now nearly 6 percent might also be connected to these new renting-instead-of-buying converts' ability to move to where those new construction jobs are?


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

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