Higher Home Sales with Falling Homeownership Rate

Home buyers have emerged and home sales have been pushed higher. Existing home sales rose by 9 percent in 2012 and are higher still by another 9 percent in 2013 year-to-date. New home sales – always the more cyclical figure – increased 20 percent in 2012 and are up 5 percent in 2013 year-to-date. Many REALTORS® have indicated that sales transactions would be even higher if there were a greater inventory of homes.

While buying activity remains solidly higher, the nation’s homeownership rate continues to trend down. The latest homeownership rate of 65.0 percent in the first quarter of this year is the lowest since 1995. More home sales yet falling homeownership rate: what’s going on? Could it be the investors are eating up everything in sight?

The data clearly shows investor activity picking up since 2011, after having fallen big time from 2005 to 2010. Another reason for rising home sales yet falling homeownership rate is the legacy impact of foreclosures. When a first-time homebuyer buys a distressed property, there is no net increase in the number of homeowners, though a home sale has occurred. Currently, there are 1.6 million distressed homeowners still in the foreclosure process and nearly all will switch into being renters.

All the while the U.S. population is growing and households are being formed. Some of the new households will be renters while others will be first-time home buyers. Renters immediately show up in statistics as renters. The new homeowners however are getting neutralized by foreclosed homeowners. But there will likely be a bursting out of household formation over the next five years. That is almost a given because household formation growth had been deeply suppressed at half the normal rate when young adults moved in with their parents over the prior 5 years. It’s time for 20- and 30-somethings to move out of their parent’s basement. Steady job additions to the economy will facilitate that move.

What then is the outlook for home sales and homeownership? Home sales will continue to march forward. Single-digit gains this and next year. (REALTOR® net business revenue will rise in double-digit gains of 10 to 15 percent because of solid price gains.) The number of homeowners looks to rise somewhat by year end compared to the current level – my best guess at 300,000 net new homeowners. But the number of renters will rise faster – my best guess at 700,000 net new renters. Therefore, the homeownership rate will fall further to 64.7 percent sometime this year.