February 9, 2018

A Hush Likely Emerging from Homeownership Bears

In prior editions of The Z Report, we have written extensively about the outlook for homeownership, including in a November 2016 analysis titled “Why We Believe the Homeownership Rate Has Bottomed.” Recent trends from the Housing Vacancy and Homeownership Survey produced by the Census Bureau confirm that this was the appropriate stance at the time and offer further optimism moving forward.

For 4Q17, the non-seasonally adjusted homeownership rate was reported at 64.2%, improving 30 basis points from 3Q17 and 50 basis points from 4Q16. The year-over-year increase was slightly ahead of the prior year-to-date gain and marked the fourth consecutive such improvement, which last occurred in 1Q05. Sequentially, the 30 basis point increase tied 4Q02 for the best fourth quarter trend over the last 25 years.

The momentum at year-end resulted in a 2017 average homeownership rate of 63.9%, according to this survey, improving for the first time since 2004. In fact, the 50 basis point year-over-year increase ranks as the eighth highest over the last 50 years. Encouragingly, the cyclical rebound in ownership has been led by young adults, the exact cohort where propensity to own has been called into question.

Specifically, the 2017 annual ownership rate increased 120 basis points for 25-29 year olds, the largest improvement for any cohort, followed by 110 basis points for 35-39 year olds. Ownership for 30-34 year olds increased 30 basis points, less than average, but still ranking as the sixth best cohort out of the 12 we track. Furthermore, we note that we believe young adult homeownership would be rising even faster if for-sale inventory was more plentiful.

As noted in the December 15th edition of The Z Report, the incremental homeownership rate in 2016, the latest year available, had not only increased for five consecutive years for 25-34 year olds but the absolute level was equivalent to 2007, recovering the entire recessionary drop.

Many respected economists, investors and analysts previously took a more negative stance on the projected path of homeownership, arguing numerous headwinds such as a rising share of young adults still living at home, elevated student debt, tight mortgage credit, preference to rent and more. As an example, as recently as 2015, the Urban Institute published an in-depth paper that concluded homeownership rates were going to decline this decade and through 2030 to roughly 61%.

Time will obviously tell whether the recent improvement in homeownership is a blip amidst a secular downshift as pundits suggest or the beginning of a cyclical recovery as we believe. While it is unlikely that young adult ownership rates will return to levels generated from 2000-08 when mortgage credit underwriting was negligent, we calculate that 25-39 year old ownership rates could still climb 390 basis points before reaching the prior trough from 1982-2007. In other words, there is plenty of cyclical runway ahead for young adults that are increasingly shifting to the family formation portion of their lives.
 

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