The vacancy rate for single-family homes increased in 2013 and remains well above bubble and pre-bubble levels.
What? Too much new single-family construction? It sounds hard to believe, with only 618,000 single-family housing starts in 2013, heading toward 622,000 in 2014 – far below the pre-bubble average of 1.1 million per year in the 1990s. Even when adding in multi-unit building, which is booming, construction remains a laggard in the housing recovery and is contributing less than it should to employment and economic growth.
Of course, the historical norm doesn’t tell us what the just-right level of construction is now. That depends on the rate at which new households are formed. If new construction runs ahead of household formation, more homes sit empty and the vacancy rate rises. In 2004 and 2005, during the bubble, construction of single-family homes soared to over 1.5 million units. Then, during the bust, household formation slowed, in part because more young people lived with parents. Too much housing and too few households were a dangerous cocktail during the housing bust and recession, causing the vacancy rate to climb until 2010. Since then, the vacancy rate has fallen, but single-family construction has continued to wallow near all-time lows.
Newly released data from the Census Bureau’s American Community Survey (ACS) show that the vacancy rate for single-family homes actually ticked up a bit in 2013. That’s a big surprise. It suggests even today’s low level of single-family construction might still be too much, too soon. To determine whether we’re building too many homes, we need first to understand household formation, and then the vacancy rate.
Single-Family Rentals Increased Despite Low Household Formation Rate
To understand what’s happening with vacancy rates, let’s start by looking at changes in households and housing units in the past year broken down by owner-occupied and rented, and single-family and multi-unit:
|Type of unit||Change, 2012 to 2013, ‘000s||Change, 2012 to 2013, %||Change, 2006 to 2013, ‘000s||Change, 2006 to 2013, %|
|Owner-occupied multi-unit (i.e. condos)||18||0.5%||-269||-6.4%|
|Renter-occupied multi-unit (i.e. apartments)||263||1.0%||2259||9.7%|
|Total single-family units, incl. vacant||226||0.3%||4701||5.5%|
|Total multi-family units, incl. vacant||199||0.6%||2131||6.5%|
|Total housing units, incl. vacant||356||0.3%||6496||5.1%|
|Note: total housing units and total households include mobile homes, boats, RV’s, vans, etc. and their occupants.|
Although slightly fewer young adults are living in their parents’ homes, don’t get too excited. Fewer are heading their own households, and the true young adult homeownership rate slipped in 2014.
This morning, the Census Bureau released 2014 data that show whether Americans own, rent, or live under someone else’s roof. (See note.) As we’ve pointed out before, the published homeownership rate is often a misleading guide to what’s really happening in the housing market. For instance, suppose young people move out of their parents’ homes into rental apartments. That would lower the published homeownership rate because the number of renters has increased – even though the number of young homeowners is unchanged.
Using these fresh 2014 data, we update several key measures of housing and living arrangements, including:
These three measures are closely related. If young people move out of their parents’ homes and become either renters or homeowners, the share of young adults living with parents goes down, while the headship rate for young adults goes up. Furthermore, the true homeownership rate equals the published homeownership rate times the headship rate – and therefore takes into account whether people are dropping out of or entering the housing market. Thus, it gives a clearer picture of whether the housing market is recovering. With that overview, here’s what the new 2014 data show.
True Young-Adult Homeownership Rate Falls in 2014, Reversing 2013 Increase
Let’s start with those millennials in the basement. They’re still there, but, ever so slowly, more are moving out. In 2014, 31.1% of 18-34 year-olds lived with their parents, down slightly from 31.2% in 2013 and from the peak of 31.6% in 2012.
Homeowners and renters are much more likely to be neighbors in Florida than in the New York City area. The housing bust brought owners and renters closer together in most markets as many single‐family homes became rentals.
Most neighborhoods have both renters and homeowners, and that mix depends on the housing stock. Most single‐family homes are owner‐occupied and most multi‐unit buildings are rentals. But there are plenty of exceptions. High‐rise neighborhoods often have both condo owners and apartment renters. And suburban areas with mostly owner‐occupied single‐family homes often have at least a few renters sprinkled in.
Whether renters and owners live together or apart matters for two reasons. First, when every neighborhood has both renters and owners, the choice of which neighborhood to live in isn’t limited by whether you rent or buy. But in a city where neighborhoods tend to be renter‐only or owner‐only, your choices are limited. In particular, people who can’t afford to buy a home have fewer neighborhoods to choose from when looking for a rental. Second, people care who their neighbors are. That’s especially true for homeowners. When they’re asked what’s important to them about their neighbors, they say they care most about whether the people who live near them are also homeowners, according to a September 2013 Trulia survey.
Renters and homeowners are more integrated—which is to say less segregated—in some metros than in others. But overall segregation dropped between 2000 and 2010, mostly because the housing bust turned some single‐family homes in predominately owner‐occupied neighborhoods into rentals.
Where Renters and Owners Mix – And Where They Don’t
To analyze how integrated or segregated renters and owners are in different metros, we used what’s called a dissimilarity index, which is a measure of how evenly two distinct groups are distributed across a geographic area. For each metro area, this index ranges from 0 to 1:
The index equals the percentage of owners or renters in a metro that would have to move to a different neighborhood for all neighborhoods to have the same mix of owners and renters. (Throughout this post, “neighborhood” means Census tract. See note below.)
Among the 100 largest U.S. metros, the top four where renters and owners are most integrated are in
Florida. In the top three—Lakeland‐Winter Haven; North Port‐Bradenton‐Sarasota; and Palm Bay-Melbourne‐Titusville—fewer than 30% of households would have to move to equalize the mix of owners and renters across all neighborhoods. Overall, the 10 metros where renters and owners are most integrated tend to be in the Sunbelt.
|Top 10 Metros Where Owners and Renters are Most Integrated|
|#||U.S. Metro||Dissimilarity index of owners vs. renters|
|1||Lakeland‐Winter Haven, FL||0.28|
|2||North Port‐Bradenton‐Sarasota, FL||0.29|
|3||Palm Bay‐Melbourne‐Titusville, FL||0.29|
|4||Cape Coral‐Fort Myers, FL||0.31|
|8||Little Rock, AR||0.32|
|Note: among 100 largest metros. The dissimilarity index ranges from 0 to 1. A lower dissimilarity index means owners and renters are more integrated (i.e. less segregated).|
If forced to spend less on housing, people would rather change where they live than whom they live with. Downsizing is the #1 way people would reduce their housing costs. Furthermore, renters are significantly more willing to move or get a roommate than homeowners are.
In good economic times as well as in bad, financial hardship can always strike. And when it does, people might have to cut back on housing, which is typically the largest household expense. However, cutting housing costs involves hard tradeoffs: moving can be expensive and a hassle, and living with family, friends, or strangers can be a challenge. To understand how people might make these tradeoffs, we asked 2,048 Americans in late March and early April 2014 the following question:
“If you experienced a major financial hardship (e.g., lost your job, unexpected medical bills), and you needed to cut back significantly on your housing costs, which of the following would you most likely do? Please select all that apply.”
Here’s what they told us.
Everyone’s Top Cost-Cutting Strategy: Downsizing
Facing financial hardship that required cutting back on housing, nearly 2 in 5 people (38%) would move to a smaller home — more than any other option by a wide margin. In fact, twice as many people would prefer downsizing than the next most popular actions of (1) renting out part of their home to a roommate or housemate or (2) moving to a more affordable neighborhood. Far fewer people would take the more radical actions of living in their car or not paying the rent or mortgage.
|How Would You Cut Your Housing Costs If Hit With A Major Financial Hardship?||Share|
|Move to a smaller home/apartment||38%|
|Rent out part of my home to a roommate/housemate||19%|
|Move to a more affordable neighborhood in the same city, metro area, or region||19%|
|Move to a more affordable city, metro area, or region||16%|
|Move into my parents’ home||14%|
|Move into my children’s (or other relative’s) home||8%|
|Rent out part of my home to vacationers/visitors||6%|
|Live in my car, office, or another place that’s not intended as housing||5%|
|Move into a non-relative’s home||4%|
|I would stay in my current home but stop paying the rent or mortgage||4%|
Though the published homeownership rate for young adults is still falling, true homeownership among young adults started rising in 2013. Adjusted for longer-term demographic shifts, young-adult homeownership is now at pre-bubble levels, but middle-aged homeownership is lagging.
The latest Census data shows homeownership is still falling for young adults, and the National Association of Realtors (NAR) reports that the share of first-time home-buyers is slipping. While the housing market is clearly improving, with four of the five key indicators of the housing recovery from our Housing Barometer at least halfway back to normal, it looks like the recovery is happening even without much improvement in first-time homeownership. Does that mean the housing recovery isn’t for real?
Not so fast. The official homeownership rate published by the Census gives a misleading picture of homeownership trends. In fact, homeownership among young adults is both on the rise and not too far off from where demographics say it should be. To see this, we did two things in this analysis: (1) account for changes in household formation to get a true measure of homeownership, and (2) adjust for longer-term demographic shifts to compare homeownership levels today with pre-bubble levels.
The answer: our “true” homeownership rate disagrees with the published homeownership rate, and shows that homeownership among young adults increased between 2012 and 2013 after hitting bottom in 2012. However, once we adjust for the huge demographic shifts among young adults – far fewer young adults are married or have kids than two or three decades ago – homeownership in 2013 was roughly at late-1990s levels. That means that the demographic shifts among young adults account for the entire decline in homeownership for 18-34 year-olds over the last twenty years. In other words, if the pre-bubble years of the late 1990s can be considered relatively normal, than today’s lower homeownership rate for young adults might be the new normal, thanks to demographic changes.
But that doesn’t mean all’s well. There may be longer-term damage to homeownership from the recession – but to the middle-aged, not millennials. Homeownership among 35-54 year-olds is lower today than before the housing bubble, even after accounting for demographic shifts. Here’s why.
Young Adult Homeownership Actually On the Rise
The published homeownership rate equals the share of households that own their home instead of rent. It does not, however, capture changes in whether people are dropping out of the housing market to live under someone else’s roof, like those millennials in their parents’ basement, who – in case you missed it – are for real. But if, say, people move out of their parents’ homes and into their own rental apartments, the published homeownership rate would still be falling even if the share of young adults who own remains the same.
Instead, we looked at the true homeownership rate, which equals the number of owner-occupied households divided by the number of all adults; in contrast, the published homeownership rate equals the number of owner-occupied households divided by the number of all households. Of course, the true homeownership rate is always going to be much lower – by half or more – than the published homeownership rate because there are roughly twice as many adults as there are households. The key point, though, is that the published and true homeownership rates can move in different directions if the number of adults per household is changing. That is, in fact, what happened during the recession and recovery (see note #1).
During the recession, as more young people moved in with their parents and fewer headed their own households, published homeownership rate fell from 44.1% in 2005 to 36.8% in 2012 – the 7-point decline was a 17% drop in homeownership. (What we’re calling “published” numbers actually differ slightly from the quarterly and annual homeownership estimates by age group published by the Census – see note #2.) However, the published rate understated the decline: the true homeownership rate for young adults fell from 17.2% in 2005 to 13.5% in 2012 – a drop of 22%.
Then, during the recovery, more young people started to form their own households, primarily as renters. The additional renters pushed the published homeownership rate for 18-34 year-olds down further in 2013 to its lowest level since our analysis begins in 1983:0 comments