We have done a lot of quantitative and qualitative research on the future of homeownership, and concluded that homeownership is likely to fall eight percentage points, from 70%* in 2005 to 62% in 2015. Fox Business News did a nice job interrogating us on homeownership rates, for those of you who prefer video.
From 2005 to 2015, homeownership will fall from 70.0%* to 62.1%, influenced by the following:
| Drivers | Effect on Homeownership Rate | Details |
|---|---|---|
| Foreclosures | -5.6% pts | Foreclosures and short sales will displace an unprecedented number of homeowners |
| Cyclical Trends | -3.0% pts | The propensity of households to own a home will fall from the peak of the housing cycle and will overshoot the historical norm, due to a fledgling economy, poor consumer confidence, tightening mortgage credit and other factors |
| Positive Demographics | +0.7% pts | Positive demographics of an aging population, whose propensity to own increases as they age until they reach their 70s, will push homeownership upward |
By 2025, however, we believe homeownership will return to 67.1%. Here are the drivers:
| Drivers | Effect on Homeownership Rate | Details |
|---|---|---|
| Foreclosures | +3.9% pts | Due to 70% of foreclosed homeowners returning to homeownership |
| Cyclical Trends | +0.9% pts | Due to a return to better economic conditions and normal lending conditions, the propensity of households to own a home will revert back up to the historical norm |
| Positive Demographics | +0.2% pts | Positive demographics of an aging population, whose propensity to own increases as they age until they reach their 70s, will push homeownership upward |
Many factors contribute to homeownership. Here are our thoughts on each through 2025:
- Mortgage rates and government backing – We assume that mortgage rates will gradually rise to the 6% – 7% range over time, partially due to a rising risk premium over Treasuries as the government guarantee will only be effective after underwriters take losses.
- Housing affordability – We assume prices rise at approximately the same rate as incomes.
- Economic conditions – Below average economic growth.
- Age distribution of the population – Pretty easy here as we know how old we will be in 2025.
- Immigration – Similar to historical trends prior to 2005.
- Homeownership Rate by Age of Household – Our biggest assumption is that the homeownership rate by age of household will return to the average between 1982 and 2003 (before the bubble years). This seems like the most reasonable assumption, with better affordability assumed to be equally offset by poorer credit quality among the rental population.
The American Dream of Homeownership is still alive and well, as confirmed by several surveys, including ours. However, we are going to return to requiring future homeowners to save and to take on debt that they can afford to repay. This will be a shock to some, but we all know it is the right thing to do.
*While the published homeownership rate peaked at 69.0%, we know from the decennial Census that homeownership was underestimated by approximately 1.1%.
