The big housing news this week is that the
homeownership rate has dropped to 63.4% which represents the lowest rate in 48
years. That news definitely is making headlines. Yet, to fully understand what
this means we have to look at the story that created these headlines.
There is no doubt the homeownership rate has
declined since the housing crisis. Here is a graph showing the homeownership
rate over the last twenty years. It skyrocketed during the housing boom and 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 own. 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 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 will follow.
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