Aug012014

Home ownership rate hits new lows

US policymakers want to increase home prices and maximize the home ownership rate. Prices are up, but the home ownership rates continues to drop.

want_a_houseDeclines in the home ownership rate were inevitable when the housing bubble popped. Foreclosures pushed people out of their homes and into rentals at an unprecedented rate. While policymakers have managed to manipulate supply to cause a rise in home prices, demand still hasn’t picked up, and the home ownership rate continues to slide.

It shouldn’t be too surprising the home ownership rate isn’t rising. New home sales are weak, and so are pending home sales, recently slipping 1.1%. Further, new multi-family construction is up, so many more rental units are coming to market. For the home ownership rate to rise, more owner-occupant sales must occur than new rental units come on line. Right now, that isn’t happening.

The decline in home ownership rates may also reflect a generational shift in attitudes toward home ownership. I believe the current generation won’t have the unbridled enthusiasm of the previous generation — thankfully — and they will be more cautious about buying, which is a natural reaction to the carnage they witnessed, but ownership is primal, and no matter how bad lenders and government officials screw everything up, people will still want to own if it’s advantageous for them to do so, and probably even if it’s not.

Homeownership Rate Continues to Decline

The seasonally adjusted national homeownership rate fell to 64.8% during the second quarter of 2014. This marks a drop of 4.6 percentage points since the peak rate of 69.4% during the second quarter of 2004, according to the Census Bureau’s quarterly survey.

Homeowner-Rate_2q14

The homeownership rate declined by 0.3 percentage points year-over-year. The current rate is also below the 20-year historical average of 66.9%.

The data continue to show declines in homeownership across all age groups, with the largest declines being experienced for younger households. For example, the homeownership rate for those under age 35 currently (second quarter of 2014) stands at 35.9%, which is 7.7 percentage points lower than the peak rate of 43.6% (second quarter of 2004). For those 35 to 44, the homeownership rate is currently 60.2%, 9.9 percentage points lower than the peak rate of 70.1% (first quarter of 2005).

The homeownership rate will continue to decline as pent-up housing demand is unlocked, as such new households are more likely to be renters than homeowners.

I expect the home ownership rate to hit bottom soon. With foreclosures down and hedge funds no longer buying homes to convert to rentals, the number of homes being converted from owner-occupancy to rentals is slowing dramatically. I doubt we see any significant increase in the home ownership rate, as it will probably level out near the 64% rate that proved stable for about 40 years.

The failure of housing policy

The goals of US government housing policy are to increase in resale value of houses and maximize the home ownership rate. Buying a home is characterized as the best investment a middle-class family can make, and home ownership has become synonymous with the American Dream.

During the early 00s, on the surface conditions looked great. House prices were appreciating rapidly, mortgage equity withdrawal was fueling an economic boom, subprime lending was providing home ownership opportunities to everyone, and the American Dream was being recognized by a record number of Americans.

For government officials, this was touted as the success of their policies. Critics of these policies were mocked or widely ignored as the ravings of madmen. Housing subsidies are detrimental to America. Evidence of this epic failure is the collapse in home prices and the resulting 7-year economic malaise caused by the withdrawal of the HELOC abuse stimulus from the American economy. Now we can show their failure was complete as the home ownership rate hits an 18-year low.

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