Homeownership is dead

The hopes for a recovery in the homeownership rate fade as people forming new households choose to rent instead.

Housing_deathFor over 100 years, government administration policy favored homeownership. Politicians believe homeowners are more invested in local communities, so they are less likely to commit crimes or participate in the occasional riot.

However, I believe politicians are more motivated to encourage homeownership because houses provide a retirement savings account that lessens the demand for public services by senior citizens. Homeownership was characterized as the best investment a middle-class family could make, and home ownership has become synonymous with the American Dream.

During the early 00s, subprime lending provided poor and minority borrowers greater access to the free money from home price appreciation. More people realized the American Dream than any time in history. It was the best of times — until it wasn’t.

The most recent datum for the homeownership rate is 63.4%, a forty-eight year low.


For the last several years, the housing recovery meme included the widespread belief that everyone still wanted to own a home and the recession was holding back the inevitable flood of buyers. But is that true? Is home ownership still the American Dream?

Last year first-time homebuyer participation hit a three-decade low. It’s clear the Millennial generation is choosing the freedom of renting over the ball-and-chain of homeownership. What happens to the housing market if first-time homebuyer rates fall to record lows and remain there for many years? Over the next decade, we’re going to find out.

Labor Market Gains Not Sparking a Single-Family Housing Recovery


The unemployment rate is marching ever lower, and the economy is approaching full employment, but still single-family housing is lagging. This is prompting some to wonder, what will it take to turn things around?

Higher wages would help.


One suggestion is that once unemployment falls low enough we’ll see the long-awaited single-family housing recovery. If this were true, one would expect that metro areas with already-lower unemployment would be seeing a single-family turnaround.

To test this theory, metro areas were ranked by their August unemployment rate compared with their historical average. Around 43% of metro areas have an unemployment rate lower than the 2000 to 2004 average. The 25 that are doing the best are concentrated in Texas, California, and states in the Northwest. Austin TX has the lowest relative unemployment rate. In August, the unemployment rate there reached 3%, which is 62.3% of the 2000 to 2004 average of 4.8%.

The average unemployment rate in these 25 metro areas is 3.9%, compared with 5.6% for these same areas in 2000 to 2004, and 5.1% for the total U.S. today. In other words, employment is looking healthy in these metro areas compared with historical averages and the U.S. overall.


Comparing the total number of permits in the 25 metro areas to the rest of the U.S. suggests two important patterns. First, multifamily housing permits in the top metro areas are now above prerecession levels. The rest of the country is just approaching prerecession levels. Low unemployment has been enough to generate the multifamily recovery.

The majority of new households formed over the last six to eight years have elected to rent rather than own. It isn’t difficult to understand why.sold_into_slavery

By and large do potential homeowners under 35 have any good reason to believe in the American Dream?

Will they be as prosperous as previous generations? Or will they merely slave away to pay the bills of previous generations and bail out their housing mistakes?

Will they enjoy upward social mobility? Or will they be burdened by the excessive debts required to operate the system created by previous generations?

Will they experience a life better and richer and fuller? Or will they be dutiful slaves working to provide creature comforts to the previous generations while getting none of those benefits for themselves?

Will they believe all men are created equal? Or will they believe they are hapless surfs destined to toil endlessly for their superiors in previous generations?

The reality is that anyone buying a house today is paying an inflated price at a super low rate to bail out bankers and buyers who lost their minds 10 years ago.


However, even in these 25 metro areas, single-family housing permits remain significantly below historical levels. This suggests that even where unemployment has fallen to historically low levels, it has not been enough to boost single-family permits.


The longer term view.


These results may signal a more permanent shift from single- to multifamily housing.

If this is true, homeownership is dead.


It is worth noting that redoing the analysis excluding Texas does not alter the general conclusions, meaning the results are not biased by the energy boom.

More plausibly, these results suggest a single-family housing recovery will simply take more time with low unemployment, perhaps long enough to generate significant wage growth or for labor force participation to increase. This is consistent with evidence elsewhere that a low unemployment rate right now is an insufficient sign of a recovered economy.

Has the recession merely delaying the inevitable, or if there is a grass-roots shift in attitudes toward home ownership?

I believe Millenials 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. Unfortunately, the reality is that homeownership simply isn’t as advantageous as it used to be.

With high prices and little prospect for the above-average appreciation the Baby Boomers experienced, owning a home isn’t a “must” like it was 30 years ago, so Millennials don’t feel much urgency — and they shouldn’t. Buyers today are signing up to pay off the debts of the previous generation that got in over their heads. It’s hard to get excited about that.


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