The Census Homeownership and Vacancy Survey (HVS) released Tuesday shows that the U.S. homeownership fell over the year to an unadjusted rate of 63.7%, down slightly from 63.8% last year. At face value, the continued drop in the homeownership rate isn’t necessarily cause for optimism in the housing market. After all, first-time homebuyers face significant challenges in today’s market: prices and rents are rising faster than incomes, inventory of starter homes hovers near post-recession lows, and student debt is making it difficult for young households to save up for a down payment. However, the devil is in the detail of the report, and there’s reason to be content with last quarter’s numbers. The continued growth in household formation is good for both the housing market and the general economy. Last quarter, we saw household formation tick up to 0.5% year-over-year, or 805,000 new households, but the increase was made up of more renter households rather than owner-occupied households. This effectively is why the homeownership rate has dropped: a greater share of new households since 2006 have been renters rather than home owners. But the margin is slimming: about 46% of new households over the past year were owner occupied.
That said, it’s not all rainbows and butterflies when it comes to consumer sentiment on homeownership. In Trulia’s end of the year survey, the share of Americans who say homeownership is part of their American Dream declined for the first time in five years. While the overall drop from 75% to 72% was modest, millennials soured on homeownership the most: in 2015, 80% considered homeownership as part of their American Dream, compared to 72% last year. Given millennials make up the largest pool of potential homebuyers in the U.S., this should be at least somewhat disconcerting. If the for-sale housing market is to continue building steam in the years ahead, this demographic will need to transition into homeownership in order to support the resale of homes by their older counterparts. Though home buying among millennials is likely to be volatile in the short-run, the long-run potential for this generation to support housing consumption in the U.S. is large.
Last, we think the Trump administration’s economic policies might actually push down the homeownership rate in the short-run. While President Trump called out the 50-year low homeownership rate during his campaign as reason to “bring back the American Dream”, we believe he faces gale-force demographic headwinds that will be tough to overcome with economic policy alone. Since young households aged 18 to 34 represent the largest living age group in the U.S. and nearly 40% are living with parents or relatives, any job-growth or tax-related policies that encourage this age group to form new households will likely push them into renting first as they emerge from their parents’ basements. In turn, this will likely push the homeownership rate down even further before they turn to homeownership in the long-run.
