THE HOUSING BOOM THAT HAS POWERED THE economic expansion since the 2001 national recession has been heavily concentrated in owner-occupied units—single-family homes and multifamily condos. But the rental market has been staging a comeback recently, and the nation's homeownership rate has stagnated. This development most likely is a temporary phenomenon, and powerful forces should get homeownership back on an upward track before long.

SHIFTING SANDS During the early stages of the current economic expansion, job growth was decidedly sub-par, while historically low mortgage interest rates prompted a major shift in existing households from rental to homeownership status. As a result, the nation's homeownership and rental vacancy rates simultaneously climbed to record levels by early 2004.

The surging demand for single-family homes and condo units generated very large house price increases, pushing the cost of buying a home upward and causing a serious deterioration in affordability measures—particularly in the high-priced West and Northeast regions. At the same time, the growing number of vacancies in rental units held down rates and led to widespread rent concessions.

This shift in the relative costs of renting and buying eventually revived the attractiveness of rental apartments. Furthermore, the resumption of healthy job growth by early last year helped fuel the demand for apartments—a classic cyclical phenomenon. As a result, the home-ownership rate has edged down from the high of last year, and the vacancy rate for rental apartments has fallen substantially from its 2004 peak. Indeed, the absolute number of homeowners has stagnated recently after a long uptrend, whereas the number of renters has been on the rise following years of serious erosion.

WHERE'S IT GOING? The homeownership rate may very well deteriorate a bit more in the near term as house prices continue to rise and the Federal Reserve orchestrates a meaningful increase in the entire interest rate structure. But house prices are bound to slow down before long, rents are in the process of firming up, and mortgage rates most likely will stabilize next year. These forces—along with strong, ongoing support from public policy—inevitably will restart the strong drive toward homeownership.

SHORT- AND LONG-TERM FORECASTS The NAHB's short-term forecast shows a 6 percent decline in total housing starts for 2006, with slippage heavily concentrated in the single-family and condo markets. In that environment, the homeownership rate should edge down as the rental market does relatively well. In this regard, the NAHB's quarterly Multifamily Housing Market Index has been showing marked improvements in both current and expected conditions for the market-rate rental housing sector.

In the longer term, we're projecting a recovery in the owner-occupied share of housing production and the resumption of an upward trend for the homeownership rate. Improvements to the rates for lower-income households and racial and ethnic minorities, along with upward pressures associated with the overall aging of the population, should lift the overall homeownership rate above 70 percent within a few years.

Chief Economist, NAHB Washington, D.C.