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How low can the American homeownership rate go?

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The American homeownership rate fell from 69.2% in 2004 to a low of 65.4% in the first quarter of the year, but how much further does that rate have to fall?

Paul Diggle, a property economist with Capital Economics, asked that question in a new research report released this morning.

The future of homeownership depends a great deal on how young buyers will view homeownership in the future.

Will tight credit keep young households out of the market for a longer period of time? And even if they can get back into the market, will student loan debt and fears of making a bad investment turn younger Americans away from the home buying option?

"Over a longer horizon, the case for further falls in the homeownership rate hinges on whether there has been a permanent shift in the tastes and preferences of American households away from owner-occupation," Diggle said Tuesday. "Hard evidence is thin on the ground, but that doesn’t appear to have happened."

But even with prices falling and the assumption that some pent-up demand could return to the market, Diggle worries that 1.7 million additional homes will fall into foreclosure over the next five years.

With all of these factors taken into consideration, Diggle believes it's reasonable to estimate that the homeownership rate will decline to about 64% by 2015.

"This would take the rate back to 1995 levels," he said. "The flipside of a falling homeownership rate is a rising rental rate. Compared to 2004, an additional 6.6 million households are renting, more than 90% of the increase in total household numbers over that period. Were the homeownership rate to continue falling in line with our expectations, the rental sector could expand by up to one million households per annum over the next few years. That is going to create opportunities for investors, who will own an increasing proportion of the housing stock."

kpanchuk@housingwire.com

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