According to the latest report from the Mortgage Bankers Association's (MBA) Research Institute for Housing America (RIHA) the continuing decline in homeownership rates is merely returning the country to more normal levels. The RIHA report "Homeownership Boom and Bust 2000 to 2009: Where will the Homeownership Rate Go from Here?" was conducted by professors Stuart Gabriel of UCLA's Anderson School and Stuart Rosenthal of Syracuse University.
The homeownership rate has declined from an all-time high of 69.2 percent in 2004 to 66.4 percent in the first quarter of 2011. The report calls the higher rate an unsustainable level that coincided with looser credit conditions that enhanced household access to mortgage credit and a less risk-averse attitude toward investing in a home. The authors found that the increase in homeownership was present in all groups but was most pronounced among individuals under age 30. Homeownership began to decline with the onset of the housing crisis in 2007 and is now back to about where it was in 2000.
Homeownership has long been seen as a symbol of economic achievement and as an important mechanism for accumulating household wealth. On a macroeconomic level homeownership increases housing demand and likely contributes to new home construction while households tend to spend out of the equity of their homes. Given how critical homeownership and housing are to the economy, the important question is whether the rates of ownership will fall still further.
"The question of why homeownership rates are falling now is really a question of why they were so high during the middle of the last decade," said Gabriel. "From the late 1960s to the mid-1990s, U.S. homeownership rates were relatively stable between 64 and 65 percent. Our findings suggest that the boom and bust in homeownership rates over the last decade was driven in part by an initial relaxation of credit standards followed by a tightening of credit with the onset of the 2007 financial crash. Evidence also suggests that households headed by people in their 20s and 30s were willing to take more risk with respect to homeownership in the boom years, followed by a return to a more conservative approach after the crash."
Future levels of homeownership will depend on what are uncertain forecasts both of attitudes toward it and on the credit market and economic conditions. "If underwriting conditions and attitudes about investing in homeownership settle back to year-2000 patterns and, if the socioeconomic and demographic traits of the population look similar to those of 2000, Rosenthal said, "then the homeownership rate may have bottomed out and will not decline further. If, instead, household employment, earnings and other socioeconomic characteristics over the next few years remain similar to those in 2009, then homeownership rates could fall by up to another 1 to 2 percentage points beyond 2011. Those declines are likely to be greatest in cities and regions in which house prices were most volatile in the last decade."
There are two sources of housing demand - the need for shelter and the desire to invest in real estate. The study began with a simple model of these demands as underlying drivers of homeownership. Consumption demand is sensitive to socioeconomic factors in the household such as income, household size and other attributes that affect the willingness to pay for housing. By itself shelter demand does not imply purchase as renting a home could satisfy it as well. Investment demand, in contrast, is driven by the household's taste for risk and market conditions that affect the expected return from real estate as compared to other investments. Earlier studies have illustrated that where consumption demand is higher than investment demand the family is likely to rent whereas higher investment demand is likely to lead to homeownership.
The authors used household level census data from 2000 and 2005 stratified by age. As homeownership rates depend on past decisions and since a family's housing tenure status is determined only at the time they move, estimates of models were run twice, once for all families and then for a subset that had only recently moved into their homes.
Two of the 34 control measures developed for the study are highlighted in the Executive Summary. First, a higher median value of owner-occupied homes in the area in which the individual lives acts as a deterrent to homeownership after controlling for other factors such as household income. The second factor is the level of local house price volatility. While this measure does not appear to affect the consumption demand for housing, it does affect the investment demand which is surely sensitive to house price volatility since it has a direct effect on the potential for capital gains and losses. If households are risk averse, volatility should discourage homeownership.
Analysis showed that the rise in homeownership between 2000 and 2005 were driven entirely by changes related to ease of access to homeownership. During that time shifts in household socio-economic attributes alone would have caused homeownership rates to decline. During the period 2005-2009 the pattern reversed and, all things being equal, changes in household socio-economic traits and house prices would have boosted homeownership rates but the effect of deteriorating credit conditions offset those factors. Over the entire 2000 to 2009 period the changes in access boosted homeownership enough to offset adverse shifts and resulted in a 1 percentage point net increase in homeownership. In other words, a combination of changes in mortgage credit standards and attitudes towards investment in homeownership likely contributed to much of the boom and bust in homeownership over the decade.
Results of the analysis of the recent-mover subsample were similar but considerably more dramatic. From 2000 to 2005 changes in the coefficients related to market access are estimated to have increase the share of movers choosing to own by 5 percentage point while from 2005 to 2009 the share of movers choosing to own was reduced by 10.5 percentage points.
The authors say that taking the various estimates into account it appears that homeownership rates may have bottomed out by early this year. However, it is more likely that the rates may decline further, by as much as one or two percentage points, over the course of the next few years.