Has the Homeownership Rate Hit Bottom?

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Has the U.S. homeownership rate turned a corner or will it continue to decline? While homeownership rebounded above the second quarter’s national ownership rate of 62.9 percent, that 51-year low got the attention of many in the industry. The Census Bureau has reported that the 2016 fourth quarter rate inched up two basis points to 63.7 percent, a far cry from the rate of 69.2 percent reached in the last quarter of 2004, the highest such rate on record.

Homeownership can act as an indicator for economic health, which makes the current Census Bureau figures of great interest. Even more, experts are looking to the future to make sense of a complex economic picture and an uneven recovery. The next question becomes: will things stay the same, or will they get better?

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What to Make of Recent Homeownership Rates

The latest data from the Census Bureau is in and it’s arguably a mixed bag. While the quarterly homeownership rate rose from 63.5 to 63.7 between the third and fourth quarters of 2016, it’s still at historic lows last seen in the early 1990s. Moreover, the Wall Street Journal reports the current rate of homeownership is down, compared to 63.8 percent in the fourth quarter of last year, and in terms of the lesser-tracked seasonally adjusted rate, which fell to 63.5 percent compared to 63.6 percent a year ago.

However, homeownership is continuing to inch up, compared to the second quarter of 2016, when homeownership fell to 62.9 percent, a level last recorded in 1965. The figure also rebounded in the third quarter to 63.5 percent, the same as the first quarter of 2016. However, this is still a historically low level of homeownership. The rate was last in this territory in 1967 and then again for just one quarter in 1985.

This new, post-recession normal of a sinking homeownership rate is at odds with the strong growth seen from 1986 through 2004. Yet opinions diverge over whether that’s a bad thing. In the Washington Post last August, Charles Lane argued the economy was healthier today than in 2004. He noted equity was at a healthy 58 percent nationally, meaning homeowners are more able to weather economic downturns. Others agreed. “The drop in the homeownership rate [for the second quarter] to historical lows isn’t necessarily a bad sign,” Ralph McLaughlin, chief economist for Trulia, told Bloomberg. McLaughlin noted part of the reason for the drop was a faster rate of growth for renter households, which could mean that post-foreclosure-crisis consumer confidence is rising.

title-source_house-and-keyWhy Homeownership Could Further Decline

There are some who think homeownership levels haven’t bottomed out yet and that rates could slump again in 2017. In its Winter 2017 Housing and Mortgage Market Review (HaMMR), Arch MI, a mortgage insurance firm, predicts that homeownership rates “will continue to sag” in 2017 and beyond. The report elaborated:

The trend towards more high and low skilled jobs at the expense of the middle class will likely continue (one estimate is that the middle class has shrunk by 20% or more since 1970). This is primarily due to technological innovations and free trade.

Arch MI also echoed McLaughlin, noting that the rate of household formation by rental households is expected to accelerate, partially due to demographics. Moreover, Arch MI predicts higher mortgage rates in 2017, which, it argues under the current circumstances, could cause fewer total originations, more long-life loans, and fewer trade-up home sales.

The recent suspension of an Obama-approved cut to the Federal Housing Administration’s (FHA) mortgage insurance premium is another point of consideration. Initial reports suggested the Trump Administration’s about-face could hurt homeownership. “Some people will actually get priced out of the market,” Ken Fears, an economist with the National Association of Realtors (NAR), told CBS News at the time.

However, other housing experts disagreed that suspending the mortgage insurance cut would have made a difference. “Access to mortgages would have expanded marginally,” wrote researchers at the Urban Institute (UI). UI experts Bing Bai and Laurie Goodman estimated a typical, low-down-payment FHA borrower would have saved roughly $47 per month and that savings amount would have decreased over time. So while the suspension may not hurt homeownership, it doesn’t help, either.

Enduring problems, including lack of housing affordability and inventory, could also cause a further drop for the homeownership rate. Arch MI’s predictions for home prices and rents is that both will rise faster than income, causing an affordability crunch for potential buyers and leaving less wiggle room for renters hoping to save for a down payment. Policy changes in Washington are expected to stimulate demand, but Arch MI says the impact on supply “will be limited.”

Why Homeownership Could Experience Growth

On the other hand, there is a case to be made for an improving homeownership rate going forward. Nela Richardson, chief economist for Redfin, told The M Report she believes access to mortgage credit will improve in 2017 and that mortgage rates won’t rise much higher than current levels. At the time, the M Report noted that while the 30-year fixed-rate mortgage rates ended 2016 at an average of 4.32 percent, a two-year high, rates fell in January to 4.12 percent. The latest rate average from Bankrate is even better, at 4.07 percent.

Another factor that could help the homeownership rate in 2017 is the raising of conforming loan limits for Fannie Mae- and Freddie Mac-backed mortgages. It’s the first time the limits have been raised in a decade, with borrowers now able to qualify for conforming loan products for loans of up to $424,100 in most U.S. markets, and up to $636,150 in some high-priced housing markets.title-source-_-mortgage-on-apple

Lastly, there’s a chance the homeownership rate could be helped by an increasing availability of low-down-payment mortgages. HousingWire called three-percent mortgages “the new normal” in June, as a slew of large commercial lenders, including Chase and Wells Fargo, followed the lead of Fannie Mae and Freddie Mac, rolling out their own three-percent mortgages. Such programs are predicted to help young buyers, who haven’t had time to save for a large down payment, break into the housing market.

Conclusion

The latest Census Bureau report is good news, in the sense that the country is moving further from the record second-quarter low. However, a wider historical view shows the country isn’t out of the woods yet. Unfortunately, conditions don’t give a clear indication of further growth or decline in homeownership. What can be said, is that homeownership is unlikely to jump to heights last seen in the housing boom, or collapse to even further unprecedented lows. It may be some time before more Americans take the dive into homeownership.