The big housing news last week was that the homeownership rate has dropped to 63.4% which represents the lowest rate in 48 years. That news definitely is making headlines and raising questions. To fully understand what this means, let's look at the story that created the headlines.
There is no doubt the homeownership rate has declined since the housing crisis. Given that many who bought into homes during that time were not well qualified and have dropped out of the ownership market, and given the overall impact of the housing crisis on the economy, it is not surprising that homeownership numbers decreased dramatically. Below is a graph showing the homeownership rate over the last twenty years. It skyrocketed during the housing boom but has steadily fallen since the bust:
The story behind the headline…
The dramatic fall in the rate over the past year must be looked at very closely. The rate is determined by the “number of households” who rent versus those who are owner occupied. Let’s assume you have nine friends that live on their own (thus forming a household); six of them own and three of them rent. That would mean that 66.6% (6 out of 9) of your friends that live on their own are homeowners.
Now, let’s assume you have another friend who has been living with his parents. He would not be considered a separate household because he lives within his parents’ household. Once that friend moves out of his parents’ home and gets a place of his own, he will become part of the household count. Let’s assume, since he is just starting out, that he moves into a rental. When he does, you now have ten friends that live on their own. If six still own their home and four of your friends now rent, the homeownership rate of your friends drops to 60% (6 out of 10). The number who own didn’t decrease; but the percentage decreased.
With the economy improving and job numbers looking better, more and more young adults are beginning to move out and get a place of their own. However, most will start living their independence in a rental situation thus driving the “percentage” of homeownership down. Auction.com explained the most recent drop in homeownership rate this way:
“This occurred as household formations popped, implying millennials are riding an improved labor market out of mom and dad’s house. Roughly a third of millennials live at home according to Census data, an elevated figure. Continued gains in the labor market will coax increased numbers out into their own places, a majority of which will be apartments, as this age cohort lacks the financial wherewithal to buy.”
What does this mean to the future of homeownership?
The great news is that study after study has shown that Millennials aspire to homeownership as they still see it as a major part of the American Dream. As they get more comfortable with their financial situation, many of the Millennials who finally made it out of their parents’ homes this year will become homeowners over the next several years. An increase in homeownership rates should follow. Does that mean we will achieve the record numbers achieved during the bubble? If we do, let's hope it's due to increasing prosperity across boundaries as more and more people are able to live the dream! And, as always, if you'd like more information or have questions, please ask. I'm here to help!