When will the homeownership rate bottom out? It’s a good question without a definite answer, but obviously we haven’t found the bottom yet.

The most recent reading of 62.9% matches the historical record-low set back when the government first began tracking these data, in early 1965 (see graph below). However, with a little bit of context, we can better understand the for-sale housing market and the apartment market.

Mount Stupid
For most of the time the homeownership rate has been tracked, it’s remained within a relatively narrow range. Between 1965 and about 1998, when policy changes and incentives started to push the homeownership rate to record highs, the rate remained within a relatively narrow range, from 62.9% to 65.8%. Beginning in 1997, however, we blew past that threshold and didn’t stop until homeownership reached 69.2% in mid-2004.

The run-up occurred very quickly, which, of course, we know was untenable, and the homeownership rate started collapsing about as quickly as it had increased, creating a symmetric pattern, which the graph above illustrates. I call this “Mount Stupid” because not only was it unsustainable, but also because it was a critical factor in the near collapse of the global economy. We are still coming down from Mount Stupid.

So what does this tell us about the housing market? Clearly, the for-sale housing market is still dealing with the fallout from the crisis, even though the economy has been growing for more than seven years. The market meltdown impaired the ability of many to save enough money for the requisite downpayment and caused a tightening of lending standards for first mortgages that is still constraining first-time home buyers.

Moreover, tighter regulation such as the Dodd–Frank Wall Street Reform and Consumer Protection Act, passed in the wake of the crisis, has made it more challenging for banks to lend, not just for mortgages but also for construction financing to build new homes. Available land for building homes in desirable locations is scarce, further complicating matters. These conditions are keeping the for-sale inventory at incredibly low levels and limiting the ability of many to buy homes.

This is especially true of entry-level housing, where relatively few homes are available for purchase and few are being built. Many households would like to be first-time home buyers but can’t. Moreover, most millennials are still in their mid-20s and are at least six to eight years away from becoming home buyers (at least for those who desire to do so).

Reasonable Expectations
So when does homeownership start to consistently increase? Probably not soon. The regulations and credit conditions holding the housing market back are unlikely to abate much in the near term. The homeownership rate will likely head lower before it rebounds. Over time, however, lending standards should slowly loosen. Importantly, millennials will one day be in their 30s, which is of paramount importance because of the positive (and durable) correlation between age of householder and the homeownership rate. That intimates that the homeownership rate will increase over time. But once it does, it’s improbable to expect another run-up into the high-60% range. That was an artificial anomaly that couldn’t be maintained. Yet, a return to mid-60% homeownership seems reasonable over time.

Until then, the for-sale housing market’s loss is the apartment market’s gain. Many of these potential first-time home buyers will be renting (in addition to the ones sleeping in Mom and Dad’s basement). This is true not just of the well-educated, sophisticated millennials living in posh, Class A urban apartments, but also of the many who would be considered to be marginal home buyers—those with less than stellar credit, savings, and employment, who might have to purchase a home that’s not in pristine condition or in the most expensive locale.

This group grew significantly (if not artificially) during the late 1990s and early 2000s housing boom and were one of the key groups that contributed to the unsustainable increase in the homeownership rate. Many were young households in their 20s. Today, it’s almost the inverse of the housing boom years—many of these households have little chance of becoming homeowners. Consequently, they’re keeping demand for Class B and C apartments strong.

While this shift isn’t likely structural, it does suggest that the apartment market probably has at least five to six years before it starts losing those mid-20s, educated, urban millennials to the for-sale market, and possibly even longer before it starts to lose the marginal home-buying crowd.