Real Interest Rates Remain at Record Lows

Click to access Real%20Mortgage%20interest%20rates%20blog%202016%20June.pdf

Real, inflation-adjusted, interest rates have declined greatly since 1980. At that time, with the risks of variable inflation and surging oil prices, the real mortgage interest rate was 8%. It declined to 5% in the 1990’s and 4% in the 2000’s before falling to 2% in the 2010’s. The financial cost of owning property has rarely been lower.

House Values are Up, Way Up

House prices grew relatively consistently from 1970 through 2000, with a spike in 2005-9 and a return to trend values in 2010-12. In the last 10 years, house prices have increased by 6% annually in nominal terms, or 4% annually in real terms.

Home Ownership Rate is Rebounding, Up 2%

The US homeownership rate averaged 47% from 1900-40. It increased smartly in post WWII times to 60% by 1955 and 64% by 1965. Homeownership averaged 64%+ for the decade of 1969-78. It increased by 1% during 1979-81. In the midst of a difficult depression, homeownership rates dropped back to 64% by 1985, about the same for the last 20 years, setting a “normal” level. Homeownership rates stayed at 64% for the next decade. Ownership rates increased from 64% to 69% in the next decade before declining right back to 63% by 2015. In the last 7 years, despite many headwinds, the home ownership rate has increased by 2%.

Number of Homeowners has Jumped by 7 Million

In 2000, there were 69M owner-occupied homes in the US. This increased by a solid 7M to 76M by 2005. The housing market hit a lull and the number of owner-occupied homes essentially stayed flat for a dozen years, through 2017. The supply of owner-occupied homes then rose by a strong 7M in the next 4 years to 83M!

International Comparisons

https://en.wikipedia.org/wiki/Home-ownership_in_the_United_States

https://www.urban.org/urban-wire/us-homeownership-rate-has-lost-ground-compared-other-developed-countries

US homeownership rates are similar to other developed economies.

Housing Supply

https://www.mercatus.org/bridge/commentary/what-are-homeownership-rates-telling-us

The housing market is inherently volatile, typically rising by 2 times the trend and then falling to one-half of the trend. Annual housing starts averaged 1.6M from 1960-2008. They declined by a severe 75% to just 0.5M in 2009. Housing starts have subsequently grown 3-fold to 1.6M annual housing starts, but the accumulated lack of new supply is impacting housing markets today.

Housing Market by Segments

By Age Group

https://www.mercatus.org/bridge/commentary/what-are-homeownership-rates-telling-us

A generational perspective on recent U.S. homeownership divergence by income and race

The period from 1982-2000 showed homeownership rates by the 5 age segments remaining relatively constant; 65+ 78%, 55-64 80%, 45-54 76%, 35-44 67% and <35 40%. The 65+ group increased homeownership from 75% to 80%. During this time, the overall US homeownership rate increased from 65% to 69%, mostly due to the aging of the population, now more heavily weighted towards the groups with 76-80% homeownership versus the 40-67% younger groups.

Homeownership rates grew from 2000 to peak rates in 2004, before declining significantly for all groups except for the 65+ cohort which essentially held it’s own. The adjacent 55-64 class fell 4%. The middle 45-54 group dropped 7%. The typically homeownership growing 35-44 group cratered by 9%. The young <35 group fell by 5%. Hence, the overall rate fell dramatically during this time.

https://www.bloomberg.com/opinion/articles/2021-04-15/home-ownership-for-millennials-may-finally-be-within-reach

This difference in home ownership experience is reflected in generational wealth summaries.

By Marital Status

https://en.wikipedia.org/wiki/Home-ownership_in_the_United_States

There is a 30 point gap between married couples and other groups, with 84% of married couples owning homes versus about 55% for other family structures.

By Location Type

https://www.census.gov/library/stories/2017/09/rural-home-ownership.html#:~:text=Rural%20areas%20have%20higher%20homeownership,holds%20in%20all%20four%20regions.

https://www.census.gov/newsroom/blogs/random-samplings/2016/12/homes_on_the_range.html

https://www.freddiemac.com/research/insight/20210602-rural-home-purchases

81% of rural households own their homes versus just 60% for urban households.

By Income Group

A generational perspective on recent U.S. homeownership divergence by income and race

Historically, 80% of the top half of household incomes have been homeowners, while in the bottom half, just 50-60% have owned their homes.

By Racial Group

A generational perspective on recent U.S. homeownership divergence by income and race

The US shows dramatically different homeownership rates by racial category. The differences between the 1995 non-Hispanic White rate (70%) and Others/Asians (50%), Hispanics (42%) and Blacks (42%) remain large in 2021 where we see White (74%), Other (57%), Hispanic (48%) and Black (44%). The groups homeownership share gain from 1995 to 2005 were similar, ranging from 6-10%, but the decline from 2005-2015 was only 3-4% for Whites and Hispanics, but 7% for Blacks and Others. The improvement from 2015 to 2021 has been 2% for 3 groups and 4% for the Other/Asian group.

Summary

The Great Recession flattened the housing market. The number of owner-occupied homes in the US remained level at 76 million from 2006 – 2017. The number of housing starts plummeted from 2.0M to 0.5M per year, compared with an historic average of 1.6M. New home construction first exceeded 1.2M units (75% of historic average) again only in 2020, a dozen years later. New home-owning households have increased by 7M units in the last 4 years! The homeownership rate is up 2 points, from 63.5% to 65.5%. Supply is responding to increased demand and higher home prices. Homeownership rates will increase with the economic recovery, but be constrained by higher home prices.

Amid a pandemic and a recession, Americans go on a near-record homebuying spree