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Homeownership rate falls to lowest since 1993

Economists question whether tumble will continue or has bottomed out

declining

The national rate of homeownership in the first quarter of 2015 hit the lowest it’s been since 1993, which continues an ongoing decline in the rate, the Department of Commerce’s Census Bureau announced today.

The homeownership rate of 63.7% was 1.1 percentage points lower than the first quarter 2014 rate of 64.8% and a 0.3 percentage point drop from the fourth quarter of 2014.

The homeownership rate is an important lagging indicator of demand, says Jonathan Smoke, chief economist for realtor.com, noting that nothing quite explains what happened in the housing boom and bust like the homeownership rate and the associated implications for demand and supply.

“At 63.7% we’re now back to Q1-1993 levels and actually 63.7 was the low point for 1993,” Smoke says.  “That level effectively means we have lost all of the gains from the Clinton-W Bush eras. At this level, we are essentially slightly lower than the average rate in the 1970s and 1980s as well.  You have to go all the way back to the 1960s to see a lower rate that stuck.

"But the rate itself is a lagging indicator because it reflects the percent of households that are owners. So I think this number now more underscores what we’ve been through versus where we are going,” Smoke says. “In terms of where we have been, the rate bears witness to the fact that we have record levels of renters now, and for this decade, essentially all net new households have been renters.”

Smoke notes that there is also a record numbers of owners now as well. And the pace of household formation is on an uptick, yet the industry has essentially added nothing to the housing stock for a decade.  

"We’ve gone from having a demand problem and a supply surplus to having solid demand and a dearth of supply," Smoke says. "So where will new households live? Vacancy rates show little room for rentals and little excess now for owned housing, especially in the fastest growing and strongest markets."

As noted here, an April 15 research report from analysts at Goldman Sachs, “Demographics support homeownership, tight credit does not,” says that after peaking at 69.4% in 2004, the homeownership rate in the U.S. has been declining for a decade.

Based on their research and analysis, they project the homeownership rate to drop further over the next two years, bottoming at 63.5% in 2016.

That’s a little different than what Ed Stansfield at Capital Economics sees happening.

“The homeownership rate fell further at the start of the year to a 22-year low of 63.7%,” Stansfield writes in a client note. “However, with credit conditions now loosening and employment set to continue growing strongly, we suspect this long downward trend may not last for much longer.

“Finally, the strong 1.5 million annual rate of household formation suggests that the 1.7 million reading at the end of last year was no fluke. As we have previously argued, a long- overdue upturn in household formation, as more young adults leave the parental home, could provide a significant boost to homebuilding over the coming years,” he says.

Smoke’s analysis tracks with this reading. He notes that the 63.7% number wasn’t a surprise as he forecasted that homeownership would fall this year under 64%. But he doesn’t expect it to go much lower especially with mortgage rates remaining so low.

“The homeownership rate is likely to bottom this year or next not far from where we are now,” Smoke says. “By historical patterns, the rate could indeed go up.  The simple math behind what it costs to rent versus buy shows that if you can afford the down payment and qualify for a mortgage, it is cheaper to buy rather than rent in 80% of the counties in the US now.  Low vacancies for rentals, higher rents, and the economics favoring buying will not encourage net new households to be mostly renters.”

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