Tuesday, July 27, 2010

How far will the homeownership rate fall?

by Bill McBride on 7/27/2010 07:32:00 PM

Earlier today the Census Bureau released the homeownership and vacancy rates for Q2 2010.

I posted a few graphs this morning, and I noted that the homeownership rate had fallen to the 1999 level of 66.9%.

A few years ago - when the homeownership rate was at 69%, I forecast that the rate would probably fall to the 66% to 67% range. Here is a repeat of the graph from this morning showing the trend of the homeownership rate since 1965.

Homeownership Rate Click on graph for larger image in new window.

Note: graph starts at 60% to better show the change.

As I noted this morning, the homeownership rate increased in the '90s and first half of the '00s because of changes in demographics and "innovations" in mortgage lending. My guess is the increase due to demographics (older population) will probably stick, but the mortgage "innovation" increase will disappear.

Using the data from the Census Bureau on number of households per age cohort, we can calculate what would have happened to the overall homeownership rate if the rate per age cohort had stayed the same as in 1989 or in 1999.

Using the 1989 percentages, the homeownership rate would have increased from 63.9% in 1989 to 66.2% in 2009 just because of the aging population. Using the 1999 homeownership percentages, the homeownership rate would be 66.8% given the changes in demographics. That was the basis for my original forecast of the homeownership rate falling to the 66% to 67% range.

It is certainly possible that the homeownership rate might fall further than I originally expected since certain cohorts now own at a lower than historically normal rate - and many of these people might be turned off on home ownership for some time (if not forever).

Homeownership Rate by Age CohortThe second graph shows the homeownership rate by age cohort for 1989, 1999, 2005 (peak of housing bubble), and Q2 2010.

For those currently under 30, the homeownership rate is above the 1989 and 1999 levels - probably because most of these people were too young to participate in the insanity and some have taken advantage of the first time home buyer tax credit.

For the 30 to 60 groups, the homeownership rate is currently below the 1989 and 1999 levels. These groups were in their early 20s to early 50s during the bubble years - the prime buying years.

For the groups above 60 years old, the homeownership rate has stayed above the 1989 level. Most of these people already owned and probably didn't participate in the insanity.

But notice the highest cohort (over 75 years old). The homeownership rate is above the bubble years! This could mean that some people are staying in their homes, perhaps waiting for a better market to sell.

This does shows that the most impacted cohorts are currently in the 30 to 60 age groups, with the 30 to 35 year old cohort the hardest hit group (in their mid to late 20s during the bubble). The next hardest hit groups are the 45 to 59 cohorts - probably because some people were moving up to more home than they could afford.

For now I'll stick with my prediction of the homeownership rate falling to 66% or so, but it could certainly fall lower.