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Next week, the Census Bureau will release its quarterly Housing Vacancy Survey. It will contain the latest estimate of an important indicator of American prosperity: the homeownership rate. Last quarter, this benchmark rate hit 62.9%, its lowest level since the 1960s. We believe for the next several years it is headed lower.
Since its peak in 2004, the homeownership rate (HO rate) has declined at a steady pace. We summarized the rollercoaster track the HO rate has run in our comprehensive report earlier this year [LINK to HO white paper]. In that report, we identified the demographic and economic drivers of the HO rate and the dynamics that led to its spectacular rise and dramatic decline over the last 25 years.
What is the outlook for American homeownership trends going forward? There is a growing body of research and analysis on the subject, but the conclusions are mixed. Optimists think the HO rate will rise going forward. They cite the rising trends in minority homeownership rates, particularly for Hispanic and Asian American households, as these segments experience higher relative growth in their older, wealthier age cohorts.
Moreover, the Millennial generation, which is significantly larger than the previous Gen-X group, is just reaching its peak home buying age. Pessimists cite the lasting damage of the Housing Bust and the anemic financial conditions of households in their 20s, 30s and 40s. All of these points have some validity. But the net result of these factors is indefinite.
Here is how we see the issue at iEmergent, and it begins with the definition of the HO rate. The HO rate is calculated as the number of homeowner households divided by the total number of households. For the HO rate to rise, the growth in the number of homeowners must be greater than the growth in the number of households. The chart below illustrates this relationship. When homeowner growth has exceeded household growth (the green areas), the HO rate has increased. When household growth has been higher (the red areas), the HO rate has declined.
In thinking about that HO rate arithmetic, another point becomes clear. For the HO rate to halt its decline, households must buy homes, but not just any home purchase will help. The only purchase transactions that increase the HO rate are purchases by non-homeowner households. In some cases, that might be a former homeowner that had sold or lost their home, but primarily it will be a first-time homebuyer, or FTHB. (If an existing homeowner household buys a home and sells its previous home, there is no change to the HO rate. If it keeps its previous home and rents the new one to another household, the HO rate actually declines.)
At iEmergent, our analysis indicates that household growth is currently shifting to a range that will be back above 1% per year after several years of sub-1% growth. This is due to the coming of age of the large Millennial generation whose older members are now in their early 30s. They have only just begun to affect the household formation numbers, but don’t yet have income and wealth to significantly impact homeowner growth.
Homeowner growth has been negative for nine of the last 10 years, due primarily to home foreclosures and forfeitures, which are just now returning to pre-Housing Bust levels. In addition, as more FTHBs emerge from the Millennial generation, homeowner growth will shift upward into positive territory. However, it will continue to lag overall household growth for a while. In our estimation, FTHBs will not provide a big enough push to raise the HO rate for at least three years. Thus, the HO rate will continue to decline.
The new iEmergent 2017-2021 forecast will be released in the next few weeks. It will contain the extensive customer and loan product segmentation detail across regions we usually provide, including the FTHB segment and its Millennial sub-segment.