From Jason Payne, Market News Analyst …
Ever hear of a “false alarm”?
Of course you have. But here’s a brief reminder of what one looks like:
Last week, a federal report reminded investors that the nation’s homeownership rate is near an 18-year low. This economic trend reflects millions of Americans who have lost homes to foreclosure, can’t get a mortgage or haven’t been able to save for a down payment.
Furthermore, the homeownership rate is likely to fall further before hitting bottom.
So shouldn’t we be panicking that the American dream of homeownership is drifting out of reach?
Shouldn’t we be freaking out, like Wile E. Coyote with a burning stick of dynamite in his shorts?
Nope. Not at all. And I look forward to explaining this “false alarm” theory in the second half of this article.
But first, let’s recap last week’s report about the easy-to-misinterpret national homeownership rate.
U.S. Homeownership Rate Falls on Higher Costs for Buyers
As reported last week by the U.S. Census Bureau, national homeownership declined again during the fourth quarter of 2013 as higher borrowing costs and tight credit blocked many first-time buyers.
Specifically, the share of Americans who own their homes was reported to be 65.2% for the fourth quarter, down 20 basis points from 65.4% a year earlier and down 10 basis points from 65.3% in the previous quarter. Similarly, the seasonally adjusted rate was 65.1%, unchanged for three straight quarters.
Accordingly, the reported U.S. homeownership rate is still hovering close to the levels of the mid-1990s – after peaking at 69.2% in June 2004.
A “False Alarm” for Investors
So why shouldn’t investors be freaking out?
Well, at this stage of the housing recovery, the falling homeownership rate turns out to be misleading – due largely to an interesting phenomenon amongst our nation’s young adult population.
You see, for young adults (who were hit especially hard in the recession and housing crisis), the decline in their homeownership rate might paradoxically be a sign of improvement.
As deftly explained in this recent commentary from Trulia’s chief economist, households can be one of two things: owners or renters. And the Census Bureau’s homeownership rate is based on the share of households that are owners…
…but when young adults live with their parents (or when older people live with their grown children) (or when certain individuals live with housemates), they are technically neither owners nor renters, and they don’t count in the homeownership rate. That’s why the homeownership rate can mislead: It omits people who are not in the housing market themselves as owners or renters.
This is similar to the better-known shortcoming of the unemployment rate, which doesn’t count people who are “not in the labor force” for various reasons, including having given up looking.
Fortunately, when the homeownership rate steers us wrong, the “headship rate” (housing’s answer to the labor force participation rate) can come to the rescue. It’s the percent of adults who head a household. Put another way, it is the ratio of households to adults. For example, if there are 200 million adults living in 100 million households, the headship rate is 50%.
A higher headship rate means fewer adults, on average, per household. Over the longer term, demographics explain shifts in the headship rate (and in labor force participation, for that matter). An aging population, for instance, typically increases the headship rate because older adults are more likely to head their household than younger adults are because many young adults live in their parents’ home or with housemates.
In the short term, though, economic swings affect the headship rate, just as they affect labor force participation. When people lose their home to foreclosure or can no longer pay the rent and move in with someone else, the headship rate falls. When they get back on their economic feet and move out of their parents’ or roommate’s home into their own place – either as an owner or a renter – the headship rate rises.
Exploring the Latest Headship Data
(Portions of the following analysis are adapted from Jed Kolko’s recent insightful report on the New York Times’ Economix blog.)
The headship rate peaked just before the height of the housing bubble, reaching 52.3% in 2003 and then falling to 51.2% in 2010, according to the Current Population Survey (a joint project of the Census Bureau and the Bureau of Labor Statistics). Similarly, the Census Bureau’s American Community Survey showed a slight decline over the period 2006-2010.
These declines in the national headship rate translated into approximately 2.5 million fewer households in 2010 than there would have been if the headship rate hadn’t fallen. Therefore, the decline in actual homeownership was steeper than the homeownership rate alone showed. The rate fell by 3.2 percent, but the actual share of all adults who owned a home dropped 4.9 percent — half again as much – because people dropped out of the housing market altogether.
Since 2010, the trend in the headship rate is murkier. The Current Population Survey shows an increase in the headship rate in 2011, 2012 and 2013, while the American Community Survey shows continued decline in 2011 and a near-flattening in 2012, the most recent survey. That means people have either started returning to the housing market or, at least, are dropping out at a slower rate.
Looking at the headship rate is especially important to understand what happened to young adults. The headship rate for 18- to 34-year-olds dropped three times as much as for adults over all, largely because the share of those living with their parents climbed to the highest level in decades. But this trend has either slowed or reversed.
The survey shows that the number of young homeowners has stabilized (adjusting for population growth), and the number of young renters rose by 3 percent as young adults have slowly begun to move out of others’ homes and re-enter the housing market from 2011 to 2013. (The American Community Survey shows their headship rate still falling through 2012, but by less than in the several years prior.)
In fact, the headship rate is the key to how much the housing recovery contributes to economic growth. The headship rate and the population determine the total number of households, so a rise in the headship rate means more new households, all else equal. New household formation stimulates construction activity, and construction adds jobs and investment to the economy. Builders have already increased construction to keep pace with new rental demand: 2013 saw construction begin on the most new rental apartment units in 15 years.
Headship is poised to increase. Young adults still living with their parents won’t do so forever, and the Current Population Survey headship rate in 2013 – even with its recent rise — is still below its 20-year average. That will prompt more new construction.
Of course, an increasing headship rate isn’t necessarily a good thing: at the extreme, a 100 percent headship rate would mean that each adult has his or her own household, either alone or with children. That would make for a huge construction boom but a lot of loneliness. Age, marital patterns and even cultural preferences all affect living patterns: Among those 65 or older in the United States, for instance, the foreign-born are four times as likely as the native-born to live with relatives rather than in their own household.
How soon will homeownership recover? It depends on job and income growth, mortgage credit availability, affordability and more. But today, since many young adults are still living with their parents, let’s watch first for an increase in the headship rate. And we should not be alarmed by the falling homeownership rate if it’s falling because people are renting their own place instead of living in someone else’s.
Jason Payne’s next Market News Update is scheduled for Wednesday, Feb. 12th.