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Why the homeownership rate has declined to 65% in this recession

The homeownership rate has dropped precipitously since the beginning of the Great Recession

The homeownership rate is the proportion of households that are owner-occupied. It’s calculated by dividing the number of owner-occupied households by total occupied housing units. The index has oscillated in a range of 63% to 69%. It’s currently sitting at its historical average.

MR-homeownership rateEnlarge Graph

The homeownership rate rose precipitously during the housing bubble. This was due to several reasons. First, the U.S. government has pursued an activist policy of encouraging homeownership. This goes back to the 1960s, as the roles of the government-sponsored entities like Fannie Mae expanded from market stabilization and transaction facilitation to an instrument of social policy. The U.S. residential real estate market is highly subsidized, from the mortgage interest deduction to the 30-year fixed-rate mortgage, which most Americans consider their birthright. Currently, the U.S. government bears the credit risk of roughly half the U.S. mortgage market. Guarantee fees on Ginnie Mae and Fannie Mae mortgages have been well below what private mortgage insurance charges.

The other reason why the homeownership rate expanded so much during the bubble was the relaxation of credit. Not only did homeowners believe that home prices only went up, but so did the creditors. To them, if a borrower defaulted, the value of the collateral would rise enough such that they could foreclose and recoup their costs. This allowed young adults to own a home sooner than their parents could. Instead of needing a down payment, they were able to buy a home with no money down. Obviously, this drove homeownership to unprecedented levels.

Implications for homebuilders

The Achilles’ heel for the entire real estate market has been the absence of the first-time homebuyer. In many ways, the housing bubble “borrowed” first-time homebuyers, which meant that there was a demographic air pocket when the bubble burst. That said, household formation numbers have been depressed for a long time, and that air pocket has been worked off. The low household formation numbers represent pent-up demand, and that demand will unleash as the economy and especially the job market improve.

For homebuilders like KB Home (KBH), Lennar (LEN), Ryland (RYL), Toll Brothers (TOL), and PulteGroup (PHM), this means that the period of abnormally low housing starts is close to ending. While housing starts are still highly depressed at the 1 million level (the historical average is around 1.5 million), we’ve averaged 1.3 million starts since 2002. That includes the boom as well as the bust years. In other words, we’ve underbuilt for ten years. The only reason why we haven’t seen dramatic bidding wars for new homes has been due to the low household formation numbers. Once that unwinds, housing starts could well shoot past their historical average and again reach previous peaks of 2 million units plus. If housing starts double, they will drive homebuilder earnings for a long time.

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