The homeownership rate hit a record low of 62.9% in 2016, and came off that low in 2017.

The biggest gains were in the under 35 cohort.

Homeownership is expected to increase further.

The steady decline in homeownership post-crisis has been well documented, with millennials being held most responsible and receiving most of the headlines. Given that they represent the largest generation thus far and that their median age now falls on the steepest part of the homeownership curve (see my April 2016 blog post U.S. Home Prices: More buyers than sellers), the significance placed on this age cohort is appropriate. However the negative narrative may be shifting, as data over the past year indicates that they are returning to the market with enough strength to reverse the overall trend.

The homeownership rate touched a record low of 62.9% in 2016, a sharp fall from the 69.2% high reported pre-crisis (Chart 1). In the most recent U.S. Census Bureau report for the period ending 2017, national levels have now retraced 1.3% off the lows, with the largest gains in the <35 year old cohort (Chart 2). While it may be too early to extrapolate a larger trend, the tailwinds are in place for further improvement.

JPMorgan

Household formations

The headship rate (the number of households divided by the adult population) is a key driver of household formation. A higher headship rate translates into more households relative to the population, which leads to formations. Since the crisis, headship rates have been depressed, as younger generations live with their parents for longer and delay typical milestones like marriage or having children. What was once a common accomplishment in one’s 20s is now occurring in their 30s or 40s. For example, in 1990 the median age at first marriage was 23.9 for women, but that has increased to 27.4 in the most recent Census Bureau report. This naturally pushes out formations and homeownership, but the desire is still present, as a 2016 Pew Research Center survey reports that 72% of renters say they would like to buy a home in the future.

Rent vs. Buy

Housing formations can take one of two paths — renting or owning. The trend since the crisis has been heavily skewed towards renting (see Chart 3). In fact, roughly 7.6 million households were created between 2006 and 2016, but owner occupied households remained relatively flat over that same period. However, 2017 saw conditions reverse, as total household formations increased by 1.4 million, with owner occupied households increasing by 1.5 million and rental occupied units declining by 100k. The headwinds facing potential buyers post-crisis were steep and included tighter lending standards, concerns around the economic recovery (job security and wage growth), and lingering impacts of falling home prices. However, these obstacles are dissipating just as higher rental prices weigh on millennials. Rents as a percentage of income are now at a historic high of 27%, compared to mortgage payments at 25%. Homeownership remains marginally affordable, although the gap continues to shrink.

Mortgage credit

Student debt has more than doubled since 2009 to more than $1.4 trillion, hampering the ability of millennials to own homes. The spike in debt has also coincided with a tightening of the credit box as the post-crisis mortgage lending landscape looks sharply different than the pre-crisis environment. The infamous ‘NINJA’ (no income, no job, no assets) loans have been replaced with full underwriting and full down payments for good reason! Credit availability reached a cycle low in 2011, but has been slowly improving across both government and private label channels. Ginnie Mae has become the most popular loan type for first time homeowners by accepting down payments as low as 5% and allowing lower credit scores in return for higher fees. The fees increased steadily from 2010 through 2014, but were cut significantly in 2015 as Ginnie Mae returned to profitability. Fannie Mae and Freddie Mac have also increased market share by introducing down payment assistance programs and by opening the credit box slightly. Finally, private lenders remain competitive across high loan balance mortgages supported by strong credit scores, typically offering lower mortgage rates than available through the Agencies.

Implications

Rising homeownership should boost economic growth even further. The National Bureau of Economic Research estimated that households on average spend $3,700 more in the first year following a home purchase. Additional housing demand also has the potential to push home prices higher, especially with inventory levels currently at a record low. We’ve already seen home improvement activity soar post-crisis, another positive for GDP, as some homeowners struggle to find a suitable upgrade or become priced out of market. Finally, it’s also worth emphasizing the central risk to millennial homeownership, affordability. The level of mortgage rates and home prices are key inputs, but just like the rest of the market, we’ll be focused on wage growth.