The percentage of Americans who own a home – the homeownership rate – just fell to an 18-year low. This shouldn’t be much of a surprise because we talk often about the mass exodus of displaced homeowners into the rental market.
Still, to Harry’s point, it pays to spend time speculating how this trend will resolve. Will homebuyers, typically young household-forming couples, buy this dip? Or, has the American homeownership dream simply turned into a nightmare?
First, here’s a look at the homeownership rate, charted back to 1980.
As you can see, this rate declined into 1985… but for very different reasons than the decline since 2004. Back then, homeownership became increasingly expensive as interest rates rose. For each percentage point that mortgage rates rose, buyers were left with two options: Cut back on other, non-mortgage expenses, or rent an apartment instead.
Disinflation and declining interest rates in the late ’80s spurred a rise in the home ownership rate. Then, through the 2000s, easy lending standards – along with a more-than-healthy dose of greed and euphoria – pushed the rate to an all-time high, nearly 70%.
Now, as interest rates have been held persistently low, you’d expect new buyers to push the homeownership rate higher again. After all, as the next chart shows, most households should be able to afford a mortgage now.
Here’s a chart showing the ratio of financial obligations to income. This is basically a measure of how stretched the average consumer feels, where a low ratio indicates sufficient comfort.
Clearly consumers have worked hard since 2007 to rid themselves of unnecessary financial burdens. So even while incomes have stayed low, consumers are carrying a lighter load of debt and monthly bills.
Whether this – low interest rates and fewer financial burdens – will be enough to entice young homebuyers into the market is questionable. I expect it won’t be. The freedom and flexibility of renting is, for many, worth any foregone profits derived from owning property.
Watch for institutional property investors, not everyday home-forming families, to drive the real estate market for several more years. Until we see widespread participation from the average Joes, property prices stand to bob up and down as hedge funds, not newlyweds, call the shots.