In the United States, the homeownership rate has been fluctuating in the 60-70 percent range over the past half a century.* Is this decline purely cyclical, or are there underlying socioeconomic changes exerting downward pressure on the homeownership rate?
Homeownership rate rose slowly but steadily throughout the 1960s and 1970s, before receding to a relatively stable 64% during the late 1980s and early 1990s. At the turn of the millennium, a pronounced boom-bust cycle for the housing market occurred, where homeownership reached an all-time high of 69% in 2005. After the financial crisis in 2006, homeownership has been steadily declining, falling to 63% as of the second quarter of 2016, the lowest level since 1965 (Figure 1).
* The homeownership rate is the percentage of homes that are occupied by the owner.
To understand the fluctuating rate, it is particularly valuable to examine the behavior of young Americans. In a recent blog post, Martha Deevy, Director of Financial Security at Stanford Center on Longevity, raised an important question: “Do younger people want to buy house anymore?” The Sightlines project conducted by the Stanford Center on Longevity analyzed homeownership trends across generations over the past 20 years. As we would expect based on the falling overall homeownership rate, across ages, the homeownership rate is lowest among Millennials: only one-third of Americans aged 25 to 34 own a house. Young Generation Xers (aged 35-44) are nearly twice as likely to own a home (56%). This is not just about age: Sightlines analyses suggest that Millennials are less likely to own a home than their young counterparts in 2001. The trend over time is that fewer and fewer young people are buying homes. Assuming this trend continues, as Martha Deevy predicts in her article, the overall homeownership will likely continue to fall.
Perhaps most surprisingly, the trend towards lower homeownership among young Americans persist across most demographic sub-groups. Across 25-44 year olds, homeownership rates among Whites, African Americans, and Hispanics all dropped around seven percentage point between 2000 and 2014. Where we see a slight difference in magnitude is in education: the greatest drop in homeownership was among those without a college degree.
Why are young adults today less likely to own a home than young adults of the past? In her post, Martha Deevy details several sociocultural reasons for this shift. Here, I examine three primary economic reasons:
First, the record-high homeownership rate in 2005 was partly caused by loose monetary policies beginning in the 1990s, and by the lax scrutiny of home mortgage applications. The collapse of the US housing market in 2007 forced many financial institutions to reform (or at least adjust) their code of practice. The decline in homeownership among the young cohort could be in part a natural result of this market correction.
Second, an increasing number of young people are working and living in metropolitan areas, which offer better employment and networking opportunities. Meanwhile, these places are becoming unaffordable for them. For example, in 2016, in median list price for a house in San Francisco is $1.1 million; this is more than 13 times the median household income in the city ($84,160).1 Facing the high and ever-rising real estate prices, young people are forced to choose between renting, downsizing or moving out of big cities.
Third, the pressure to pay off student loans is likely a significant hurdle for the young to become homeowners. Even though student loans were first introduced in the US in the 1950s, they didn’t expand significantly until the 1990s. Between 1995 and 2010, student loans grew at an annual rate of 7.6%, compared to the 2.5% inflation rate during the same period (Figure 2). As a result, the average student loan balance for people aged 30 to 39 was close to $30,000 in 2012.2 The default rate on those loans is 11.8%,3 more than double the home mortgage delinquency rate.
The homeownership rate in the US has fallen for more than ten years, in part because fewer young people are buying homes today. Whether this change is transitory or fundamental can only be tested by time, but persistent trends observed across socioeconomic and cultural groups speak to the potential stability of this decline. In this case, the US may be looking at lower levels of homeownership for the long-term.
1Zillow (2016). “San Francisco Market Overview.” http://www.zillow.com/san-francisco-ca/home-values/
2New York Federal Reserve (2013). “Student Loan Debt by Age Group.” https://www.newyorkfed.org/studentloandebt/index.html
3US Department of Education (2015). “Three-year Official Cohort Default Rates for Schools.” http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html
College Board (2015). “Total Federal and Non-federal Loans over Time.” https://trends.collegeboard.org/student-aid/figures-tables/total-federal-and-nonfederal-loans-over-time
Federal Reserve (2015). “How Much Student Debt is Out There?” https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/how-much-student-debt-is-out-there-20150807.html
Gallup (2015). “Fewer Young People Say I Do – to Any Relationship.” http://www.gallup.com/poll/183515/fewer-young-people-say-relationship.aspx
- Bureau of the Census (2016). “Families and Living Arrangements.” http://www.census.gov/hhes/families/data/marital.html
- Bureau of the Census (2016). “Homeownership Rate for the United States” [RHORUSQ156N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RHORUSQ156N.