In the past few years, much ink has been spilled about the homeownership rate. There’s a pretty universal acknowledgment that the numbers soared to incredible highs in those now-distant days of the middle of the past decade, hitting a peak of 69.2 percent in 2004. Today, the question seems to be, how low can it go?
The answer: No one really seems to know. Most observers think the rate will settle in the mid-60s—somewhere near their historical average. Interestingly, the country wasn’t always a nation of homeowners. In the first half of the 20th century, homeownership hovered at around 45 percent. World War II veterans, spurred on by government housing programs and the 30-year fixed mortgage, starting purchasing homes in droves in the 1950s. From the 1960s onward, the homeownership rate climbed up to include about two-thirds of households and stayed that way until the mid-1990s.
And then things got out of hand. From 1995 to 2004, the rate jumped from 64 percent to 69 percent. “That was an aberration,” says Walter Molony, spokesperson for the Washington, D.C.–based National Association of Realtors (NAR), a trade group representing Realtors. “People were introduced to homeownership who should not have been. All of these risky mortgage products affected market behavior.”
Many housing groups and economists who represent the for-sale, single-family sector believe the homeownership rate, currently at 66.3 percent for the third quarter of 2011, will stay put—absent another economic meltdown. “The homeownership rate has declined to a long-term sustainable level based on what we’ve seen since the mid-60s,” Molony says. “I think the homeownership rate is probably at a normal level right now. You would need an adverse happening to upset the apple cart. That would be a depression-type scenario.”
But not everyone thinks we’ve seen the end. The NAHB’s Crowe believes we’re in for a couple more years of declining homeownership rates before things bottom out at 64 percent or 65 percent. The problem is that there’s no real historical national precedent for what has happened over the past decade, making the future hard to project. “I’ve looked at trends in individual metro areas,” Crowe says. “We had declines in house values, followed by declines in the homeownership rate. That’s five, six, or seven years, and then it reverses in every case. I think the same thing will happen here.”
Even more dire in his outlook is Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach, Fla. He believes we still haven’t felt the worst of the housing crash and that, eventually, the homeownership rate could fall below the standard established in the 1960s.
After watching the South Florida real estate meltdown over the past five years and the slow subsequent recovery (where the bulk of buyers are from other countries), McCabe thinks the homeownership rate could fall below 60 percent. The odds of that happening rise if another recession hits or if the mortgage interest deduction goes away.
Those declines in the homeownership rate, whether minor or dramatic, bode well for the rental sector. For every percentage point drop in the homeownership rate, economists say there are 1 million households that become renter households. “Renting is less liability; it’s less responsibility; and, in most cases, it’s less expensive,” McCabe says. “Maybe there’s a huge paradigm shift where buying a home won’t be held in the same esteem as it has been in the past.”