February 10, 2017
Defying the Narrative, Positive Signs Continue for Homeownership Rate
In the November 4th edition of The Z Report, we outlined several reasons why we believed that the national homeownership rate was near a bottom. The most-frequently cited measure of homeownership comes from the Census Bureau’s quarterly Housing Vacancy Survey (HVS). For 4Q16, the government reported that 63.7% of households were owned, down marginally from 63.8% in 4Q15. Despite the year-over-year decline, we believe several positives lay beneath the headline figure.
First, based on CoreLogic data, we estimate that approximately 460,000 foreclosures and short sales were completed in 2016 on owner-occupied households. Thus, these households were owners in 2015 but very likely renters in 2016, reflecting the lagging impact of the Great Recession. If we exclude these households from the calculation, we estimate that the national homeownership rate would have increased 30 basis points from 4Q15 to 4Q16.
Second, to the degree that the figures are reliable, the Census Bureau reported a sequential increase in the seasonally-adjusted homeownership rate for the second consecutive quarter. Back-to-back increases in this measure have not been witnessed since 2Q08.
Third, despite the still-lingering effects from the recession, four summary age groups witnessed a higher reported homeownership rate in 2016 than 2015, including for under-25 year olds, 35-39 year olds, 40-44 year olds and 70-74 year olds. We are the first to admit that more granular data by age or circumstance from the government becomes suspect due to quarterly volatility; however, the last time the homeownership rate improved for at least four separate age groups in the same year was in 2005.
In addition to these underlying positives, we are even more encouraged by outsized pricing strength for homebuilders on smaller, entry-level product, which we believe directly aligns with an increased effort to supply affordable price points that heavily overlap first-time homebuyers.
For example, our analysis of over 20,000 production new homes under construction and not yet sold revealed that price per square foot was up 4% year over year in 4Q16. Within that sample, 34% of units were less than 2,250 square feet and price per square foot increased 7%. Pricing power was stronger than average for these smaller homes in each quarter of 2016. On the other hand, prices increased just 2% year over year for high-end homes sized 3,000-3,999 square feet.
In our view, while reported homeownership rates could be spun negatively, there are numerous silver linings that suggest incremental homeownership rates for young adults are improving and that the cyclical pressure on the national figures is nearing an end.