By Dirk van Dijk
A smaller percentage of Americans owned their own homes in the 4th quarter of 2009 than at any time since 2000. In the 4th quarter 67.2% of Americans owned their own home, down from 67.6% in the third quarter and two full percentage points below the peak set in the fourth quarter of 2004.
As the first graph below shows (from Calculated Risk), the homeownership rate rose steadily throughout the late 1960s and 1970s, rising from under 63% in 1965 to just short of 66% by 1980. The super high interest rates needed to slay the inflation dragon took their toll, however, and by the end of 1986, the rate had fallen all the way back to 63.5%.
We then spent a decade with the homeownership rate hovering around 64%. In the late 1990’s the rate soared, eventually peaking at 69.2%. Since then the rate has been falling at about the same rate it did in the early 1980s, with the bulk of the decline happening since the third quarter of 2006. Homeownership has always been part of the “American Dream,” and now that dream is slipping away for many Americans.
Home Ownership by Region
Regionally, the highest homeownership rates are in the Midwest (71.3%) and in the South (69.1%) where housing is generally relatively cheap, and lowest in the West (62.3%) and the Northeast (63.9%) where housing tends to be expensive.
Relative to a year ago, the biggest declines were in the South (down 0.7 points from 69.8%) and in the West (down 0.4 points from 62.7%). Those two regions have the poster children for the foreclosure crisis: Florida, California, Arizona and Nevada. From the fourth quarter of 2004 peak, however, the largest drop has been in the Midwest (off 2.4 points from 73.7%) but all regions are down.
Fewer Middle-Aged Homeowners
By age of the head of household, over the last year, the homeownership rate has actually increased slightly among the young (under 35 years old) rising 0.1 point to 40.4%, and up fairly sharply from 39.8% in the third quarter. That increase is probably due to the first-time homebuyer tax credit.
Not surprisingly, the homeownership rate increases with age, but relative to both the third quarter and a year ago, the ownership rate dropped for every group over age 35. From the peak, the rate is down sharply for every group except the Social Security set.
For example, in the 4th quarter of 2004, 77.4% of 45-54-year-olds owned their own home, now 74.0% do; then 70.0% of 35-44-year-olds were homeowners, now 65.7% are.
Rate Among Affluent Falling Faster
By income, people with above-median household incomes are far more likely to be homeowners than are people with below median incomes, 81.8% to 50.2% as of the fourth quarter of 2009. However, the decline in the homeownership rate has actually been greater among the relatively affluent than it has been among the less affluent, with the “rich” rate dropping 2.8 points and the “poor” rate falling 2.3 points.
The foreclosure crisis has not been limited to the sections of town on the wrong side of the tracks. However, relative to the third quarter of 2009, the drop among the “poor” was particularly striking, dropping by 1.5 points in just three months.
Whites are the most likely to be homeowners, with a rate of 74.5%, down from 76.0% in the third quarter of 2006 (the data was not released by race back to 2004, but the overall homeownership rate then was 69.0%). The homeownership rates for Blacks and Hispanics is far lower at 46.0% and 48.4%, respectively. Since the third quarter of 2006, the black homeownership rate is down 2.6 points from 48.6%, while the rate among Hispanics has fallen 1.3% (just a bit more than the 1.5% decline among whites) from 49.7%.
So where have all these people gone who are no longer homeowners? It does not appear that they are moving into apartments or rental housing. As the second graph shows (also from Calculated Risk), the rental vacancy rate is now at 10.7%. While that is down from the record level of 11.1% in the third quarter, it is up from 10.1% a year ago, and the 7-8% range that was normal for most of the 1990s.
Prices Relative to Renting
Part of the increase in the number of vacancies might be due to in increase in the supply of rental units. For a landlord, a vacant unit is pretty much a deadweight loss and produces no revenue. This will pressure them to lower rental rates.
Renting is a substitute for owning. People need a place to live, but they do not need to own the place they live in. One of the best clues that we were in a housing bubble is when the historic relationship between to cost of renting and the price of buying an equivalent place got way out of whack. The 30% decline in housing prices (based on the Case-Schiller index) has brought that relationship back down near historic norms, but housing prices are still a bit on the high side relative to rents (nationwide; it can vary greatly by locality).
However, with a high vacancy rate causing rents to fall, housing prices are shooting at a falling target. In any case, high vacancy rates and falling rents is not a recipe for robust earnings at the big apartment oriented REITs like Equity Residential (EQR) and Apartment Investors (AIV).
When Government Support Ends
Falling housing prices are still a threat, even though there has been a slight rebound over the last six months according to the Case-Schiller data. Much of the stabilization in prices is due to extraordinary levels of government support for the housing market, including the “first time” buyer tax credit and the Fed program of buying $1.25 Trillion of residential mortgage-backed paper. Both of those programs are scheduled to end this spring.
As housing prices sink, more and more people fall below sea level and become underwater on their houses. As they do, it becomes economically rational for them to walk away from their mortgages and let the bank foreclose on their houses.
Housing equity is (or at least was) the primary store of wealth for most Americans, particularly in the middle and working classes. In total, stock market wealth is about the same size as housing wealth, but it tends to be far more concentrated. After all, not many people have $1 billion or more in housing wealth, but most billionaires have the majority of their wealth in stocks or commercial real estate. If people feel poor because their housing equity has been wiped out, they don’t spend and that slows the economy.
The vacancy rate among owner-occupied (or not occupied as the case might be) was 2.7% in the fourth quarter. It has been in a very tight range between 2.5% and 2.9% since the third quarter of 2006. From 1996 through the middle of 2005, the homeowner vacancy rate was almost always at between 1.6% and 1.7%, with occasional spikes or dips to 1.9% or 1.5%.
If we take 1.7% to be the “normal” level of homeowner vacancies and we are now at 2.7%, with about 75 million owner occupied homes, that equates to about 750,000 extra vacant homes, those excess vacant homes will continue to weigh on the housing market until the level is brought back towards normal.
There were 130.6 million total housing units in the country, only 111.7 million (85.5%) of which were occupied. Of the 14.5% that were vacant, 10.9% were vacant year round, with the remainder seasonally vacant vacation homes. Of the 111.7 million occupied homes, 75.0 million are owner occupied, and 36.7 million are occupied rental units.
Reflecting Tough Economic Times
It thus appears that many of the people who used to own their homes, and no longer do, are doubling up with friends and family. This is probably not their first choice of living arrangements, but they are doing so because they have no other choice economically.
The best way to reduce the huge overhang of vacant houses and apartments in the country is to create more jobs so people can afford to have a place of their own. However, new home construction has traditionally been one of the principal drivers for lifting the country out of a recession. With so many housing units sitting vacant, does it really make sense to build a lot more houses that will only add to the problem?
There will always be some local areas with shortages and other areas with gluts: a vacant house in Detroit is not a good substitute for a house in North Carolina if your job is in North Carolina, so new home construction will not fall to zero -- and might even rebound a bit this year from the current very depressed levels -- but it is not realistic to expect a return to the levels seen a few years ago.
The major homebuilders like D.R. Horton (DHI) and Lennar (LEN) might see their losses diminish, or even post a small profit in 2010 (aided by tax loss carry-forwards), but it is going to be a very long time before they get back to what they were earning in the middle years of the past decade.
If there is only a tepid rebound in residential investment, it means that there will probably be only a tepid economic recovery, one that does not create a lot of jobs. Without the recovery in jobs, it will be hard to get rid of the vacant housing units across the country without resorting to bulldozers. Knocking down existing houses might statistically add to economic growth, but it sure will not add to the wealth of the nation.
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