Is the Homeownership Rate in the U.S. Falling?

By Amanda Curry · Sep 8, 2016 · Real Estate

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Image courtesy of Flickr, marc falardeau

In this article, we investigate why homeownership rates have reached all-time lows and how it is effecting the housing market.

It's always been a goal of hardworking Americans to own a home, start a family, and live the American dream. However, in recent years, we've seen a decrease in the homeownership rate. In this article, we investigate why homeownership rates have reached all-time lows and how it is effecting the housing market.

Homeownership Rates Reach All Time Lows

The US Census Bureau released Residential Vacancies and Homeownership in the Second Quarter 2016 revealing that Americans continue to experience difficulty transitioning into homeownership.

The Bureau's major findings:

1. The national vacancy rate for rental housing in 2016's second quarter was 6.7, which is not statistically different from the second quarter of 2015 or the first quarter of 2016.

2. The national vacancy rate for homeowner housing in the second quarter of 2016 was 1.7 percent, also not statistically different from the second quarter of 2015 or first quarter of 2016.

3. The homeownership rate of 62.9 for the second quarter of 2016 was .5 percentage points lower than the second quarter of 2015 when it was 63.4 percent and .6 percentage points lower than the first quarter of 2016 (63.5 percent).

The US Census Bureau began tracking the homeownership rate in 1965. The homeownership rate reached an all-time high of 69.2 percent in the fourth quarter of 2004 and an all-time low 48 years ago.

The Wall Street Journal put together the graph below from The Bureau showing that homeownership has been steadily decreasing since 2004 and has reached an all-time low just recently in the second quarter of 2016.

Losing Ground on Homeownership

So, when did we start losing ground on homeownership rates? It all began with the burst of the real estate bubble.

In the early 2000s, real estate prices rose steadily in the United State for decades and mortgages became available to consumers with programs offered by Fannie Mae and Freddie Mac. This put money quickly into the hands of some irresponsible homeowners who would later default on payments as people that could not usually afford a home suddenly could.

Foreclosures, short sales, and other reactions to the housing crisis threatened to wipe out many American dreams. These scary statistics have pushed millennials to avoid homeownership:

1 out of every 200 homes will be foreclosed upon.

Every three months 250,000 new families enter foreclosure.

Six in 10 homeowners wish they understood the terms and details of their mortgage better.

These statistics caused first-time buyers to delay or not even buy at all due to a loss of confidence in wealth attainment via homeownership.

Why is Homeownership so Difficult to Obtain?

There are many factors that have contributed to the decreasing homeownership rate including higher rent prices, decreased confidence in the housing market, and slower income growth. Let's explore some of the major contributions:

Higher Rent

Among the major factors are high home and rental prices, making it more difficult for those that are looking to purchase a home. High rent prices in particular are preventing renters from saving enough to buy a home, but have not yet peaked enough to make renting and buying comparable. The US Census Bureau reports that the median asking rent for vacant units in the second quarter of 2016 was $847 and the median price for vacant sales units was $164,500.

Income Growth

Median household income growth has been work throughout the economic recovery. After adjusting for inflation in 2014, real median household income in the US is at about the same level as in 1996. Lack of income growth has played a part in homebuyer affordability.

Gen Y

Generation Y, 18-35 year olds, are struggling financially amid student debt, growing rents, and rising home prices, according to the Wall Street Journal. Coupled with a limited amount of start homes available, this age group is struggling to get settled into their first home.

Generation Y is also delaying marriage and childbearing, putting their career at the top of their priorities list. Millennials also desire more mobility. With high transaction costs involved with buying and selling a home, desired mobility has decrease the rate of homeownership among millennials. This is reflected by the homeownership rate for 18 to 35 years olds slipping to 34.1%, the lowest levels in records dating to 1994.

Credit Conditions

Another factor preventing people from entering homeownership sooner is tighter credit conditions.

In the past ten years, lending companies have reduced access to credit. On the contrary, just a decade ago, anybody could attain a mortgage with weak credit, little to no money down, and without documenting income. For good reasons, credit conditions have tightened following the Great Recession, however, this is playing a part in the decreasing homeownership rate in recent years.

Rental Rates Increase as Homeownership Rates Decrease

The continued declines in the homeownership rate in part reflect a growing number of renter households.

In fact, some 363,000 new renter households were formed in the first quarter compared with the same time last year, about twice as many as the 177,000 new owner households.

Higher rental percentages can drive down the rate of households that own. Fortunately, renter households are likely to turn into owners in the future, so this could be potentially good news.

Low Inventory of Entry-Level Homes

For those that are seeking homeownership for the first time, entry-level homes aren't the easiest to find. For example, according to the Zillow Home Value Index, the median home value in Los Angeles is $571,200. Home values that rest in Zillow's bottom third tier have gradually increased, most recently seeing a 7.2% gain. Conversely, the inventory of these home has dropped nearly 17.9%, making it increasingly difficult for first-time homebuyers to get their hands on an affordable property.

As low mortgage rates and an improving job market spur competition for a tight supply of listings, the competition for finding an affordable property is only going to get fiercer.

Where is the Homeownership Rate Headed?

There are varying opinions on the future of homeownership rate, as seen in the chart below from Freddie Mac. It is difficult to project where the future of the homeownership rate is headed because of the uncertain constraints. It will be interesting to see moving forward where the homeownership rate is headed.

Where Can Americans afford to Buy?

With homeownership rates falling and reaching all-time lows, the National Association of Realtors reveals that there are some metros areas that are affordable with above-average hiring.

NAR reviewed employment growth, household income and qualifying income levels in nearly 100 of the largest metro areas across the country. Of the top ten metros with the highest share of renters who earn enough to buy, nine were either in the South or Midwest. Three are in Ohio:

• Toledo, Ohio (46 percent)
• Little Rock, Arkansas (46 percent)
• Dayton, Ohio (44 percent)
• Lakeland, Florida (41 percent)
• St. Louis, Missouri (41 percent)
• Columbia, South Carolina (41 percent)
• Atlanta (40 percent)
• Columbus, Ohio (38 percent)
• Tampa, Florida (38 percent)
• Ogden, Utah (38 percent)

With mortgage rates now at their all-time low, the markets listed above are well-suited for the many renters financially capable. The Midwest and South offer lower median home prices than the Northeast and West, so it's no surprise that these areas have the highest share of renters who can afford to purchase a home.

Making Your Dream a Reality

If you are one of the thousands of renters that make enough money to purchase a home and would like to make homeownership a reality, one of the most important things is to search around for an affordable mortgage rate.

BeSmartee allows you to compare hundreds of loans at once to find the best rate in your area. As a do-it-yourself service, we cut out the middle man, saving you time and money when shopping for a mortgage rate. Explore mortgage rates in your area today at www.besmartee.com.

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