Will the financial meltdown tame exurban sprawl? Is home ownership an economic problem?

Toward the end of a lengthy piece on how the financial crisis will reshape America, "Rise of the Creative Class" author Richard Florida argues that our society will finally start re-thinking suburbs -- particularly exurbs. He believes areas with a high concentration of well-educated knowledge workers will do best in a post-manufacturing economy:

"The places that thrive today are those with the highest velocity of ideas, the highest density of talented and creative people, the highest rate of metabolism. Velocity and density are not words that many people use when describing the suburbs. The economy is driven by key urban areas; a different geography is required.

"The housing bubble was the ultimate expression, and perhaps the last gasp, of an economic system some 80 years in the making, and now well past its 'sell-by' date. The bubble encouraged massive, unsustainable growth in places where land was cheap and the real-estate economy dominant. It encouraged low-density sprawl, which is ill-fitted to a creative, postindustrial economy. And not least, it created a workforce too often stuck in place, anchored by houses that cannot be profitably sold, at a time when flexibility and mobility are of great importance."

Just as the era after the Depression and World War II led to suburban growth, will our new post-crash era once again realign American living patterns? It's an interesting argument, especially if you believe that areas most rich in knowledge workers, such as Silicon Valley, New York and Boston, will thrive.

The most controversial part of his piece is his call for an end to government incentives to homebuyers, arguing they "distort demand, encouraging people to buy bigger houses than they otherwise would." However, I think Florida gives too short shrift to the community benefits of home ownership (which can include condos, not only stand-alone single-family houses) -- once you're heavily financially invested in a place, you have much more of a stake in the functioning success of that community than you do if you're a transient renter. He also underestimates the problem of disparity of housing prices: How many people in affordable areas of the country are put off by housing prices in Boston or New York -- even rental prices -- compared to what they can get elsewhere?

Instead, I think we should start with a look at changing other government actions that encourage exurban sprawl, such as: the investment and development/design tilt toward roads for private cars instead of mass transit and walkable neighborhoods; zoning regulations that favor sprawl over smart growth; and perhaps someday the effective forced subsidies by urban dwellers so those in the exurbs pay similar utility rates, even though it's more expensive to deliver services to sparsely populated outer-ring communities.

However, I think it may be worth a look at some point (clearly not right now) at *how* the government promotes home ownership, because it is certainly arguable that deductions for mortgage interest can disproportionately benefit upper-income taxpayers. As Atlantic senior editor Clive Crook notes in the article Housebound:

"The current deduction costs nearly $80 billion a year in forgone federal revenues. It is available only to the minority of households—typically affluent— that itemize their taxes. Households at the margin of choosing between renting and owning are not, for the most part, itemizers. The deduction has no effect on their choice, and thus does almost nothing to promote homeownership. What it does promote, studies show, is spending on housing—that is, people who would have been owners anyway pay more for their houses. Prices are higher than they would otherwise have been, and mortgages are bigger. As many owners have learned abruptly, this can worsen economic insecurity."

Not sure I completely agree. At the time we were buying our first home, the mortgage deduction was the difference that allowed us to afford a house at the median price point in the most affordable town in the area -- a 7-room slab ranch on a quiet street in a middle-class neighborhood -- instead of a house on a noisy street, a house that was smaller than our apartment, one that would need a lot of (expensive) work, or one that increased our commutes. So I sure appreciated the deduction. Although I suppose it's arguable that if there weren't such a deduction, price levels would had to have been lower as a result, just as prices allegedly drop when mortgage rates rise. However, that's not necessarily the case. But some other sort of tax credit that better targets middle-class homebuyers might indeed be more effective than the mortgage interest deduction we have now.

Florida suggests that instead of trying to stop foreclosures, we require banks that take ownership of homes from defaulting homeowners "to offer to rent each home to the previous homeowner, at market rates—which are typically lower than mortgage payments—for some number of years. (At the end of that period, the former homeowner could be given the option to repurchase the home at the prevailing market price.) A bigger, healthier rental market, with more choices, would make renting a more attractive option for many people; it would also make the economy as a whole more flexible and responsive."

Both Florida and Crook point to work by economist Andrew Oswald that conscludes higher home ownership leads to higher unemployment rates, because workers are less mobile and thus less able to go where jobs are. Florida summarizes Oswald's work: "[I]n both the United States and Europe, those places with higher homeownership rates also suffer from higher unemployment. Homeownership, Oswald found, is a more important predictor of unemployment than rates of unionization or the generosity of welfare benefits. Too often, it ties people to declining or blighted locations, and forces them into work—if they can find it—that is a poor match for their interests and abilities."

Not mentioned here, though, is the human cost to forcing people to pick up and move in order to find work; and the cost to a community when large numbers of people view themselves as transient residents instead of fully vested citizens. What doesn't work so well in a financial meltdown works a lot better when the economy is not in dire straits, and people are employed and emotionally anchored to their communities. However, I will admit there's a cost as well to family finances (i.e. housing issues) forcing people to stay in an area where there are no unemployment prospects. In any case, food for thought. Your thoughts?