The homeownership rate has fallen two percentage points from a peak of 69.4 percent in the second quarter of 2004 to 67.4 percent in the third quarter of 2009. Will this trend continue? The answer, of course, is not simple, but the death of homeownership is, to paraphrase, greatly exaggerated.
have reverted but recovered, and there are many similar state examples of declines and recoveries. The national homeownership rate peaked in 1980 at 65.6 percent, fell 1.8 percentage points to 63.8 in 1988, and exceeded the previous high by 1997. Texas house prices fell 14 percent from 1986 to 1988 and homeownership rates fell over 4 percentage points from 1984 to 1992 but recovered and went higher than their previous high by 1998. California home prices fell 13 percent from 1991 to 1995 and homeownership rates dropped about one-half a percentage point but revived and continued to grow throughout the rest of the ’90s.
Second, the overall homeownership rate is affected by age distribution of households. As the oversized Baby Boom generation reached ages of peak homeownership, their numbers raised the overall homeownership rate. And, as the undersized Baby Bust generation ages into the historically higher homeownership ages, their smaller numbers will diminish the impact on overall homeownership. The depressive effect on overall homeownership will be amplified in the short run by the large Echo Boom generation that will start their household formation years as renters.
Third, some say that because house prices have fallen, fewer people will want to own a home. But, that argument confuses the short-term past with the longer-term future. If a household buys a home because they need a place to live, a lower price is an incentive to buy. In many metropolitan areas, monthly mortgage payments have fallen below rent. True, some existing-home owners may have lost equity and may feel like they have less wealth than they once thought. But, if their move is contemplated within the same market, chances are that all homes have fallen at similar rates so the tide has left all boats in the same relative position. In fact, if the percentage changes are similar, then a move-up will experience more dollar savings than the perceived loss from a sale.
If appreciation is a motivation for buying a home, then it would also seem that buying low is a good idea. Long-term home appreciation is driven by the economic laws of supply and demand, which dictate that home prices are based on the cost of the underlying components, e.g. labor, materials, land, etc., and those prices will return to inflation rates that are at or above overall inflation. Including the recent past, quality-adjusted new-home prices increased an annual average of 4.9 percent in the past 45 years and quality-adjusted existing-home prices rose an average of 5.5 percent in the past 33 years. Overall price inflation averaged 4.4 percent.
Fourth, homeownership retains a number of tax advantages beyond the current and temporary home buyer tax credits. Mortgage interest remains as virtually the only consumer interest that is deductible. Real estate property taxes are also deductible, and the combined effect of tax and interest deductions allows some taxpayers to take advantage of other itemized deductions that would not by themselves push them above the standard deduction. And, home appreciation capital gains receive a unique treatment by escaping gains tax on up to a half-million dollar gain.
But, there is one significant caveat to these ownership pros. Homeownership is not for everyone, and renting a home or apartment is the right choice for many households. If mobility is an issue and moving soon is likely, then renting is a better choice because owning does have significant transaction costs. If cash savings are low and the ability to pay for maintenance and repair costs is limited, then letting a property owner worry about such events is a better idea. And large credit blemishes result in no or very expensive credit, neither of which is conducive to owning.