The U.S. homeownership rate fell again in the fourth quarter of 2014 to its lowest point in over two decades. The latest 63.9 percent ownership rate is down from the bubble peak rate of 69.4 percent. A further drop is likely this year before finally settling down in the upcoming years.
In the latest, 74.6 million American households owned their homes while 42.0 million households are renting their residence. From 10-years ago, the number of homeowners has decreased by about 1 million while that of renter households has increased by nearly 10 million. That is why we now have the lowest homeownership rate since 1994.
Clearly the lending conditions had been ridiculously lax during the housing bubble years. But the pendulum on lending swung too much the other way and thereby has greatly limited the number of financially sound renters from converting into successful owners in recent years.
Back in 2008-09, Warren Buffet, one of the most astute investors of all time, said to buy homes and then buy more homes. Many good renters did not or could not. By contrast, institutional investors who no doubt were already homeowners were able to raise money from Wall Street and did indeed purchase many properties as part of their investment portfolio. Given the rising home prices from 2008 in most places, those who bought are improving financially.
America has become more unequal in wealth distribution. It’s a simple math. A typical homeowner’s net worth is estimated to have risen to $205,000 in 2014 (from the Federal Reserve estimate of $195,000 in 2013.). By contrast, a typical renter has $5,400 in net worth. But America has fewer homeowners while renter population has exploded. This is one key reason as to why many Americans continue to say tough economic times despite the economy officially being out of recession for over 6 years.
Over the short-run, the homeownership rate is likely to fall further. The forecast for 2015 is about 500,000 net new renters and 500,000 net new homeowners. But the rise in numbers with a 50-50 split is such that the homeownership rate will continue to fall. Fortunately though, the rise in the number of both the renters and homeowners will mean increased business opportunities this year for real estate business practitioners.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.