Homeownership Decline – Not All Bad News

The recent collapse in home ownership from the financial crisis of 2008 has left many wondering what the future holds for home ownership rates. Some have argued that it “can’t get any worse” than we have seen over the last few years, and that a recovery is approaching. In response to this view, we would like to go over a brief history of Home ownership in the United States of America. We will do this by comparing the home ownership rates from each decade since the Great Depression and progress up to our current economy.

1930 Home Ownership Rate: 47.8%
In the wake of the 1929 stock market crash, home ownership stood slightly below 50% of US households. The Great Depression had not yet begun in earnest, and many homeowners had short-term loans on their houses.

1940 Home Ownership Rate: 43.6%
After the Great Depression destroyed the US economy through monetary contraction, increased trade barriers, increased regulation, and increased taxes, home ownership had dropped to 43.6%. This precipitated the formation of a government agency to insure long-term mortgage loans to make home ownership more affordable.

1950 Home Ownership Rate: 55.0%
The expansion of government mortgage programs, combined with a rising overall level of affluence significantly raised the home ownership rate.

1960 Home Ownership Rate: 62.1%
High levels of affluence in the 1950’s resulted in an even higher home ownership rate by 1960.

1970 Home Ownership Rate: 64.2%
Continued economic growth and relatively low interest rates continued to place upward pressure on home ownership rates during the 1960’s.

1980 Home Ownership Rate: 65.6%
Inflation during the 1970’s resulted in substantial gains for people who purchased at low interest rates during the early part of the decade and saw the value of their homes increase as the effect of additional money circulated throughout the economy.

1990 Home Ownership Rate: 63.9%
The high interest rates required to curb inflation combined with changes in tax laws that restricted the favorability of real estate resulted in decreased home ownership by the year 1990.

2000 Home Ownership Rate: 67.4%
Renewed emphasis on home ownership to low income individuals and ethnic minorities prompted a proliferation of government regulations targeted at making home ownership more affordable by lowering the standard for loan acceptance and reducing the required down payments.

2010 Home Ownership Rate: 66.9%
After peaking at 69.0% in 2004, the US home ownership rate declined first because of escalating prices and secondly because of the 2008 financial crisis that dramatically tightened the availability of credit for potential borrowers.

This history leaves us with the natural question of what will happen over the next six to ten years. It is exceedingly difficult to predict the future, but there are a few key factors that we are highly confident will drive the future housing market. These factors will be the source of wealth for some and the source of ruin for others.

The home ownership rate will continue to decline:
It is hard to say exactly how low the home ownership rate will go, or how long it will take, but it is certain that economic fundamentals do not justify the current rate of home ownership. We conservatively estimate that the home ownership rate will at least drop to the rate of approximately 64% where it held from 1985 through 1994.

The population will continue to increase:
The US population has increased at an annualized rate of 1.1% over the last 50 years. This slowed to 0.93% from 2000 through 2010, but is still very strongly positive. We believe that the rate of population increases will slow over time as the average number of children per household declines. However, the advent of immigration, lengthening life spans, and normal population growth will ensure that the population trajectory remains strongly positive.

The total number of households will continue to increase:
From 1980 through 2010, the rate of population growth has been 1.04% per year. However, the rate of growth in the number of households has been 1.20% per year. The reason for this disconnect in growth rates is because the average household size is decreasing. Some of this is due to smaller family sizes, some is due to divorce, and some is due to a higher rate of single parent families. It may be that the growth of households in the future regresses back toward the population growth rate, or even drops below as people move back in with parents or rent rooms to tenants. However, it is certain that there is net growth ahead for the total number of US households.

A decline in home ownership combined with an increase in total households means a net increase in renters. This observation ultimately comes down to simple arithmetic. A net decrease in the rate of home ownership combined with a net increase in the number of households must necessarily result in more net renters.

Taking these four considerations into mind, we have built a model that regresses the home ownership rate back to the 64% experienced from 1985 through 1994 by the year 2016. In addition to this, we have modeled a net increase in the number of households at the same annualized rate as was experienced from 2005 through 2010. The result of this forecast model is an estimated 5.1 million new renters by the year 2016. The following chart shows how this analysis unfolds, while overlaying the six stages of boom, bust, and recovery on top of the home ownership rate trend.

In response to this forecast, it is natural that many will anticipate acceleration in the trend of doubling-up, moving in with parents, and other such methods of cost cutting. In the case that the total number of households holds completely flat until 2016, simply regressing back to the prior equilibrium rate of home ownership will result in a net increase of 2.8 million new renters by 2016.

It is important to note that this analysis only assumes a regression to the home ownership rates of the mid 1980’s and early 1990’s. If the home ownership rate regresses back to the 1950 level of 55%, even with zero net growth in total households it results in 10.2 million new renters by 2016.

Recent news has shown that the government is coming to realize that it can no longer afford to subsidize mortgages through Fannie Mae and Freddie Mac. If these entities are dissolved and home ownership rates regress back to the 1940 (depression) level, combined the total number of households declining by 0.25% per year from highly aggressive doubling-up, it will result in 18.7 million new renters by 2016.

The bottom-line is that the regression back to reality is going to result in many more renters than currently exist in the marketplace. The proliferation of foreclosures have pushed prices down to the point where most builders cannot make money from new construction, meaning that new housing is not being built. When the wave of new renters hits the marketplace, there will be a long lag between when the rental housing demand emerges and when new supply comes onto the market. Investors who purchase prudent income property now will be ideally placed to ride this tide of new renters to wealth and prosperity.

Action Item: Immediately work to secure prudent income property. Affordability is likely to decrease in the near future as interest rates increase. With the added risk of Federal loan subsidy elimination; there is no better time to become an income property investor. (Top image: Flickr | andinarvaez)

The Jason Hartman Team

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