Homeownership Rate: Stable or Still Falling?

According to the latest report from thernMortgage Bankers Association’s (MBA) Research Institute for Housing Americarn(RIHA) the continuing decline in homeownership rates is merely returning therncountry to more normal levels. The RIHA report “Homeownership Boom and Bustrn2000 to 2009: Where will the Homeownership Rate Go from Here?” was conducted by professors Stuart Gabriel of UCLA’s AndersonrnSchool and Stuart Rosenthal of Syracuse University.</p

Thernhomeownership rate has declined from an all-time high of 69.2 percent in 2004rnto 66.4 percent in the first quarter of 2011. rnThe report calls the higher rate an unsustainable level that coincidedrnwith looser credit conditions that enhanced household access to mortgage creditrnand a less risk-averse attitude toward investing in a home.  The authors found that the increase in homeownershiprnwas present in all groups but was most pronounced among individuals under agern30.  Homeownership began to decline withrnthe onset of the housing crisis in 2007 and is now back to about where it wasrnin 2000.  </p

Homeownership has long been seenrnas a symbol of economic achievement and as an important mechanism forrnaccumulating household wealth.  On arnmacroeconomic level homeownership increases housing demand and likely contributesrnto new home construction while households tend to spend out of the equity ofrntheir homes.  Given how criticalrnhomeownership and housing are to the economy, the important question is whetherrnthe rates of ownership will fall still further.</p

 “The question of whyrnhomeownership rates are falling now is really a question of why they were sornhigh during the middle of the last decade,” said Gabriel.  “Fromrnthe late 1960s to the mid-1990s, U.S. homeownership rates were relativelyrnstable between 64 and 65 percent. Our findings suggest that the boom and bustrnin homeownership rates over the last decade was driven in part by an initialrnrelaxation of credit standards followed by a tightening of credit with thernonset of the 2007 financial crash.  Evidence also suggests that householdsrnheaded by people in their 20s and 30s were willing to take more risk withrnrespect to homeownership in the boom years, followed by a return to a morernconservative approach after the crash.” </p

Future levels of homeownership willrndepend on what are uncertain forecasts both of attitudes toward it and on therncredit market and economic conditions.  “Ifrnunderwriting conditions and attitudes about investing in homeownership settlernback to year-2000 patterns and, if the socioeconomic and demographic traits ofrnthe population look similar to those of 2000, Rosenthal said, “then thernhomeownership rate may have bottomed out and will not decline further. rnIf, instead, household employment, earnings and other socioeconomicrncharacteristics over the next few years remain similar to those in 2009, thenrnhomeownership rates could fall by up to another 1 to 2 percentage points beyondrn2011.  Those declines are likely to be greatest in cities and regions inrnwhich house prices were most volatile in the last decade.” </p

There are two sources of housingrndemand – the need for shelter and the desire to invest in real estate.  The study began with a simple model of theserndemands as underlying drivers of homeownership. rnConsumption demand is sensitive to socioeconomic factors in thernhousehold such as income, household size and other attributes that affect thernwillingness to pay for housing.  Byrnitself shelter demand does not imply purchase as renting a home could satisfyrnit as well.  Investment demand, inrncontrast, is driven by the household’s taste for risk and market conditionsrnthat affect the expected return from real estate as compared to otherrninvestments.  Earlier studies havernillustrated that where consumption demand is higher than investment demand thernfamily is likely to rent whereas higher investment demand is likely to lead tornhomeownership.</p

The authors used household levelrncensus data from 2000 and 2005 stratified by age.  As homeownership rates depend on pastrndecisions and since a family’s housing tenure status is determined only at therntime they move, estimates of models were run twice, once for all families andrnthen for a subset that had only recently moved into their homes.</p

Two of the 34 control measuresrndeveloped for the study are highlighted in the Executive Summary.  First, a higher median value ofrnowner-occupied homes in the area in which the individual lives acts as arndeterrent to homeownership after controlling for other factors such asrnhousehold income.  The second factor isrnthe level of local house price volatility. rnWhile this measure does not appear to affect the consumption demand forrnhousing, it does affect the investment demand which is surely sensitive tornhouse price volatility since it has a direct effect on the potential forrncapital gains and losses.  If householdsrnare risk averse, volatility should discourage homeownership.  </p

Analysis showed that the rise inrnhomeownership between 2000 and 2005 were driven entirely by changes related tornease of access to homeownership.  Duringrnthat time shifts in household socio-economic attributes alone would have causedrnhomeownership rates to decline.  Duringrnthe period 2005-2009 the pattern reversed and, all things being equal, changesrnin household socio-economic traits and house prices would have boosted homeownershiprnrates but the effect of deteriorating credit conditions offset thosernfactors.  Over the entire 2000 to 2009rnperiod the changes in access boosted homeownership enough to offset adversernshifts and resulted in a 1 percentage point net increase in homeownership. Inrnother words, a combination of changes in mortgage credit standards andrnattitudes towards investment in homeownership likely contributed to much of thernboom and bust in homeownership over the decade.</p

Results of the analysis of thernrecent-mover subsample were similar but considerably more dramatic.    From 2000 to 2005 changes in therncoefficients related to market access are estimated to have increase the sharernof movers choosing to own by 5 percentage point while from 2005 to 2009 thernshare of movers choosing to own was reduced by 10.5 percentage points.</p

The authors say that taking thernvarious estimates into account it appears that homeownership rates may havernbottomed out by early this year. <bHowever, it is more likely that the rates may decline further, by asrnmuch as one or two percentage points, over the course of the next fewrnyears. 

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