FEWER HOMEOWNERS...MORE RENTERS

The U.S. homeownership rate has dropped sharply as a consequence of the excesses that led to the housing crash of 2004-2008. The chart to the right, taken from an earlier post in this blog ("Homeownership Rate...Back to the Future",http://econlives.blogspot.com/2015/05/homeownership-rateback-to-future.html), shows how the rate fell by almost five percentage points over the last decade, to its current level of 63.7%. A declining rate, however, does not necessarily imply that the actual number of homeowners also declines, since an increasing number of households could probably compensate for the lower rate, that has occurred in the past. But this is not the case currently, both the rate and the number of homeowner households has fallen.

House Prices Won't Fall They Said...But They Did Fall.
Back in 2004, who remembers?...Google of course, many thought it highly unlikely that prices would fall nationally. For instance, an economist at Wachovia Securities, swallowed by Wells Fargo since then and probably the quality of their forecasts was one reason, said that "housing prices could slide back somewhat...I don't think they will plummet." Also, Mark Gongloff a writer at the all-knowing, all-reliable CNN Money stated that "Home prices don't often fall nationwide. It last happened to new home prices in 1991, and things were considerably different then...the oversupply of homes, which stretched back to the late 80s helped sink prices, but no such oversupply exists today." So was the conventional thinking before the fall. An elementary understanding of economics would have told him there are other causes behind price fluctuations besides "oversupply."


It is well known that many of the houses sold in the first half of the last decade, both new and existing houses, were to consumers who couldn't afford them. Also, most consumers purchased them under the assumption that forever rising house prices would make those house purchases a solid investment. This proved to be not so. Nationally, home prices fell 25% between 2007 and 2011, with the biggest declines in 2008 and 2009.

The precipitous drop in house prices resulted, as we now know, in a huge number of homeowners who found themselves "under water" with their mortgages. Additionally, as the recession set in, many who lost their jobs couldn't meet the monthly house payments and this led to the foreclosure crisis- with the number of foreclosures reaching nearly 2.5 million in 2009. Foreclosures have declined over the last few years, although they still hover around half a million homes annually; this compares unfavorably with the figures before the recession when around 150,000 foreclosures were recorded per year.

All of these factors, falling house prices, dropping wealth, the number of foreclosures rising, etc. have impacted the dynamics of owning or renting a home.

Household Formations are Down

Last year, the total number of households in the U.S. reached 115.5 million, an increase of 792 thousand from 2013. Although this is a remarkable 51% increase over the prior year, the number of new households in 2014 is still far lower than the average maintained over the 40-year period from 1960 to 2000. Over those forty years, the number of households increased by an average of 1.3 million a year.
The chart to the left shows that, since the onset of the 2008-09 recession, the number of new households has averaged just under 600 thousand per year (shown by the red line), this is less than half the average maintained during the last four decades of the last century. And fewer new households implies, naturally, fewer new houses are needed.

More Renters, Fewer Homeowners

The net result is that since the onset of the housing crash, and the general economic recession that followed it, we have seen the actual number of homeowners fall, while the total number of renters has increased.
As the chart "Number of Homeowners & Renters" shows, we had by 2014 1.7 million fewer homeowners than in 2006. In contrast, the number of renters shot up dramatically by 6.4 million households. This, as can be surmised, is different from the pattern we were used to seeing in the past, when both the number of homeowners and renters increased.

Younger People Shying Away From Homeownership

Unlike previous generations, where young adults would try to purchase a home as soon as possible, some even before getting married, currently we see that a majority of them are opting for renting. There are many reasons why they are making that choice now. Among them must be the inability to get credit given the large education debt load they carry. Also, many of them are staying away from the labor force altogether- witness their declining participation in the labor market. Additionally, we can't dismiss the fact that the charm of owning a home may have faded, since homeowners can't accumulate as much real estate wealth as during the housing bubble years. The chart nearby shows that the number of homeowners under 55 years old has fallen, with the largest declines observed among two groups: 25 to 34 years and 35 to 44 years. It is only among those headed  by people over 55 years that we see homeowners rising more than renters. 

Moreover, the under 25 years set has fallen for both owners and renters. This is consistent, again, with the precipitous decline in labor participation among people in this age group. They are the ones who have moved back to their parents homes, and are living in the basement playing video games.

Implications of This Trend

We've been seeing already some of the effects of this new dynamic. For instance, multi-family housing construction has recovered faster and more robustly since the recession. While single family construction rebounded by 46% since its low point in 2009, building of multi-family units has shot up by 226%. Also, while prior to the recession between one quarter and one third of the multi-family units were built as condominiums, that is not for rent, that proportion has fallen precipitously over the last four years. We find that, since 2010,  only 8% of the multi-family housing units are built for sale, the vast majority are designed to be rental units. But the average size of those rental units is under 1100 square feet- pretty much the size prevalent in the early years of the century.

More importantly, these trends also mean that the home improvement market in the future will grow less than otherwise. Rental units are remodeled less frequently than homeowned properties and, since they are smaller than owned homes, the amount spent on remodeling is going to be smaller. Thus, in general we should expect fewer remodelings and fewer funds spent on those projects. 

HOMEOWNERSHIP RATE...BACK TO THE FUTURE

The economists Carmen Reinhart and Kenneth Rogoff pointed out in their book This Time Is Different that financial crises, unlike other economic crises, tend to have bad economic effects that linger for a long time. They examined data on financial crises that occurred over the last 600 years across many countries, and concluded that booms fueled by domestic debt eventually run their course and lead to default. But their key point is that recovery from such default is slow and painful, as we have seen recently in many European countries, the most evident of which is Greece that has remained in a moribund state for several years now.

In the U.S. we are till suffering the aftereffects of the sub-prime debt boom that drove the housing expansion through the 1990s, until the implosion in 2008 that does not seem to end. One particular area that shows clearly the deleterious effects of the financial crash is the U.S. homeownership rate.
The rise in homeownership from the mid-90s, which rose from 64% in 1994 to its peak of 69.2% by 2004, was seen as a successful example of wise economic policies. For example Ben Bernanke, then Chairman of the Federal Reserve Board, said in a speech in May 2007 that

"The increase in homeownership has been broadly based, but minority households and households in lower-income census tracts have recorded some of the largest gains in percentage terms.  Not only the new homeowners but also their communities have benefited from these trends.  Studies point to various ways in which homeownership helps strengthen neighborhoods"

But it was already evident by that time that the housing boom was over. Even at that stage of the game and despite the immense amount of data and analysis available to him, Bernanke was not aware of the potential for disaster that was inherent in the subprime market segment.

In fact, conventional thinking was that the policies of the Federal Reserve Bank and the Federal government had been beneficial to the housing market and the economy in general. But in the six years since the market crashed in 2008, we are still suffering the aftereffects. Moreover, rising homeownership since the mid 90s, that was seen as an indicator of successful economic policies, has been in a free fall for ten years now. Currently, as can be seen in the chart nearby, the U.S. homeownership rate is back at levels last seen in the 1980s.


Who's Lost the Most in the Homeownership Game?

While overall homeownership fell by 4.6 percentage points in the decade ending in 2014, the largest drop was concentrated among 35 to 44 year olds, who saw their rate drop by 9.5 percentage points to just under 60% homeownership. And relative to the 1980s, we find that the overall U.S. rate is roughly equal to today's only because of gains in homeownership among those aged 65 years and older. Households in this age group saw their homeownership rise to nearly 80%- up five percentage points from the 1980s. People in all other age groups, under 65 years, actually saw their homeownership rate decline. The largest drop, as can be seen in the chart "Change from Early 1980s," is among the key 35 to 44 years group; this is a group that is in the family formation stage.

Government Policy Failures
So the easy money policies followed by the Fed, combined with Federal government efforts to improve homeownership have had, in fact, the opposite effect. After thirty years of policies that encourage greater homeownership, particularly among minorities and less advantaged groups, we find ourselves back where we started. Actually, these policies have made things worse as shown by the graph above, which is not surprising since most government actions and policies (all?) have detrimental effects on the economy and consumers. Government policies typically, either intentionally or not, benefit a specific group while they hurt the majority of consumers. In the home owning case, the intent was to improve homeownership across all groups, but we ended up only improving that of the elderly population, those 65 years and older, while that of all other age groups fell.

Homeownership, Savings and Consumers' Wealth.
It is often said the Americans do not save enough because owning a house, while it increases in value, is a valid way of accumulating wealth. And indeed it is so, as long as the value of the asset, i.e., the house, increases in value. But the housing crash, that in reality began in 2005, showed that house values, like those of any asset, can fall as well as rise.
The net wealth of American households stands today at nearly $83 trillion; despite the lack of economic growth since the end of the recession, coupled with housing markets that continue to be dormant, total wealth has increased by 32% since 2008, more than recovering the losses of the recession. However, the bulk of the wealth gains are in financial assets that account for 84% of the gain since 2008. And, more troublesome yet is that over half of the increase in wealth is due to equities gaining value, i.e. stock market appreciation- are we in the middle of another stock market bubble induced by the Fed?. But this is a topic for a future post in this blog!