by Bill McBride on 10/28/2008 10:00:00 AM
Tuesday, October 28, 2008
This morning the Census Bureau reported the homeownership and vacancy rates for Q3 2008. Here are a few graphs and some analysis ...
Click on graph for larger image in new window.
The homeownership rate decreased slightly to 67.9% and is now back to the levels of the summer of 2001. Note: graph starts at 60% to better show the change.
Here is an excerpt from a piece I wrote earlier this year on the impact of the change in homeownership rate (with a hat tip to Jan Hatzius):
As the graph shows, the homeownership rate increased from 64% in 1994 to 69% in 2004, or about 0.5% per year. With 110 million total households in the U.S., this change in the homeownership rate would mean an increase of about 550 thousand new homeowners per year during that period – even with no population growth.The second graph shows the homeowner vacancy rate since 1956. The homeownership vacancy rate was steady at 2.8% (down from a record 2.9% in Q1).
The U.S. population has been growing just under 3 million people per year on average, and there are about 2.4 people per household. Assuming no change in these numbers, there would be close to 1.25 million new households formed per year in the U.S.
Since about two thirds of all households are owner occupied, an increase of 1.25 million households per year would imply an increase in homes owned of about 800K+ per year.
So we could add the 550K from the increasing homeownership rate, to the 800K due to the increase in households (due to population growth), and the U.S. would have needed 1.35 million additional owner occupied homes per year during the period from 1995 to 2004. If the homeownership rate now stabilized, the U.S. would only need 800K additional units per year.
And if the homeownership declined – as it has been for the last 2+ years – at a rate of around 0.5% per year, the U.S. would need 800K minus 550K new units per year, or only 350K additional owner occupied units per year!
This number can't be compared directly to the Census Bureau housing starts and new home sales. There are many other factors that must be accounted for, but this does show the homebuilders had a tailwind behind them for a decade, and are now flying into a headwind.
Even when the homeownership rate stabilizes, the U.S. would only need 800K new owner occupied homes per year – far below the level of 1995 to 2004.
This means the builders have two problems over the next few years: 1) There is too much inventory, and 2) demand will be significantly lower over the next few years than from 1995 to 2004.
Why did the homeownership rate increase?
A 1007 research paper by Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf (Sep 2007), "Accounting for Changes in the Homeownership Rate", Federal Reserve Bank of Atlanta, suggests that there were two main factors for the increase in homeownership rate between 1994 and 2004: 1) mortgage innovation, and 2) demographic factors (a larger percentage of older people own homes, and America is aging). The authors found that mortgage innovation accounted for between 56 and 70 percent of the recent increase in homeownership rate, and that demographic factors accounted for 16 to 31 percent. Even as we unwind some of the excesses of recent years, not all innovation is going away (securitization and some smaller down payment programs will stay). And the population is still aging, so the homeownership rate will probably only decline to 66% or 67%, not all the way to 64%.
In summary: For as long as the homeownership rate declines – probably for at least another couple of years - this means the need for new owner occupied units will stay depressed, and even when the homeownership rate stabilizes and the inventory is reduced, demand will only be about 2/3 of the 1995-2004 period.
A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.
This leaves the homeowner vacancy rate almost 1.1% above normal, and with approximately 75 million homeowner occupied homes; this gives about 825 thousand excess vacant homes.
The rental vacancy rate decreased slightly to 9.9% in Q3 2008, from 10.0% in Q2. The rental vacancy rate had been flat or trending down slightly for almost 3 years (with some noise).
It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 40 million rental units in the U.S. If the rental vacancy rate declined from 9.9% to 8%, there would be 1.9% X 40 million units or about 760,000 units absorbed.
This would suggest there are about 760 thousand excess rental units in the U.S.
There are also approximately 200 thousand excess new homes above the normal inventory level (for home builders) - plus some uncounted condos.
If we add this up, 760 thousand excess rental units, 825 thousand excess vacant homes, and 200 thousand excess new home inventory, this gives about 1.8 million excess housing units in the U.S. that need to be absorbed over the next few years. (Note: this data is noisy, so it's hard to compare numbers quarter to quarter, but this is probably a reasonable approximation).
These excess units will keep pressure on housing starts and prices for some time.