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November 21, 2016

Homeownership: Where We Are Now, Where We Are Headed

Sean Becketti
Sean Becketti, VP Chief Economist*

Where we are now

The second half of the 20th century brought with it remarkable growth in homeownership. For the first four decades of the century, homeownership rates were relatively stable and remained below 50 percent, dropping as low as 44 percent in 1940. Following World War II, the rate of homeownership surged, propelled by the GI Bill, the institutionalization of the 30-year fixed-rate mortgage, and the creation of FHA, VA, and the GSEs. By 1965, the rate reached 63 percent, and by 1980 homeownership stood at just over 65 percent. Starting in 1995, the homeownership rate took off on another ten-year tear until it peaked at 69 percent in 2004.

Then came the housing crisis of the mid-2000s. Millions of households lost their homes to foreclosure or short sale and became renters. The homeownership rate dropped 0.4 percentage points during the Great Recession and another 3.9 percentage points since then. Today it stands at just under 63 percent, the lowest rate in half a century.

Where we are headed

Experts at the Joint Center for Housing Studies at Harvard and at the Urban Institute project further declines in the homeownership rate in the next few decades. According to these projections, homeownership rates below 60 percent are possible within 20 years.

Why do these experts expect the homeownership rate to collapse to levels not seen since the 1950s? And how reliable are these projections?

While the Joint Center and the Urban Institute use slightly different approaches, both base their forecasts on two things: first, the typical homeownership rate of different age groups and different demographic groups; and, second, Census projections of changes in the population in each of these groups.

For instance, there is a strong relationship between homeownership and age. The homeownership rate is very low for people younger than 25. The rate rises rapidly through the mid-30s, then continues to rise more gradually, peaking in the early 70s. This relationship suggests that the national homeownership rate will start to decline as the Baby Boomers begin to leave the stage and the population of the U.S. becomes younger on average.

The increasing diversity of the U.S. population has an even greater impact on the homeownership projections of the experts. And the nation will certainly become more diverse. For instance, non-Hispanic whites comprise 73 percent of the Baby Boomer generation. In contrast, Millennials are much more diverse—only 59 percent of Millennials are non-Hispanic whites. Thus, as there are fewer Baby Boomers, the population of the U.S. will come to resemble the more-diverse Millennials.

Non-Hispanic whites historically have had homeownership rates 18 to 28 percent higher than African-Americans, Asians, and Hispanics. Relying on this historical pattern, the experts expect the homeownership rate to decline as the share of non-Hispanic whites in the population falls.

Is this future inevitable?

Things may turn out very differently than the experts predict. As an example, prior projections did not anticipate the recent decline in homeownership. Of course, most of this decline can be attributed to the unprecedented housing and financial crisis of the mid-2000s, an event that very few predicted. But that’s the point. The experts project future homeownership rates by applying their arithmetic to current conditions and Census population projections. This approach does not—nor does it claim to—incorporate future macroeconomic disruptions, significant policy changes, or shifts in social attitudes in their calculations. And these types of influences ultimately will determine how accurate or off-target the expert projections are.

Most important, the factors accounting for the lower homeownership rates of non-white demographic groups may be overcome. In a relatively short time, the U.S. will become a "majority minority" nation. In this environment, persistent differences in income, education, and access to credit may finally be reduced or even eliminated. If so, we can expect a continuation of the robust homeownership experience of the late 20th century.