THE U.S. HOMEOWNERSHIP RATE INCREASED by more than five percentage points between mid-1994 and mid-2004, and the average annual increase in the number of homeowners came to a robust 1.077 million for this 10-year period. But the homeownership rate has been slipping since mid-2004, falling by a full percentage point through mid-2007, and the average annual increase in homeowners was down to 611,000 for that three-year period. Indeed, the homeownership rate retreated by half a percentage point during the past year (mid-2006 to mid-2007) and the number of homeowners increased by a meager 56,000 for that period.

PIECES OF THE PUZZLE The striking erosion of growth in the number of homeowners during the past year reflects, to some degree, a slowdown in the overall rate of household formations; and this slowdown reflects, to some degree, a slowdown in population growth. But the abrupt slowdown in growth of homeowners and the recent erosion of the homeownership rate also reflect a significant shift from owning to renting among America's households.

The “rentership” rate, a mirror-image of the homeownership rate, retreated to a record low between mid-1994 and mid-2004, and the number of renter households actually fell by nearly 300,000 per year (on average) during that 10-year period. But the rentership rate has moved upward by a full percentage point over the past three years and the number of renter households has increased, on average, by 816,000 per year. Indeed, during the past year, renter households increased by a whopping 835,000, accounting for 94 percent of total household growth—a unique development in modern U.S. history.

WHAT'S HAPPENING? The slippage of the homeownership rate in recent years and the abrupt slowdown in growth of the number of homeowners through mid-2007 partly reflect the surge in homeownership during the earlier boom period. But the rapid growth in renter households and the fall in the homeownership rate since mid-2004 also reflect serious erosion of home buying affordability since the early part of 2004. Indeed, at mid-2007 the National Association of Realtors' (NAR) Composite Housing Affordability Index was down to the lowest level recorded during the recessionary period of the late 1980s/early 1990s.

The stunning decline in NAR's Housing Affordability Index since early-2004 primarily reflects the huge accumulation of rapid home price gains that extended well into 2006, together with less important increases in prime mortgage interest rates—mainly on plain-vanilla ARMs linked to short-term Treasury rates.

The erosion of NAR's affordability measure since early this year actually understates the degree to which shifts in mortgage finance conditions have impacted affordability. The recent meltdown of the subprime mortgage sector has effectively removed financing tools that had been used by many less-credit-worthy home buyers during the housing boom and even in 2006, and regulatory clampdowns have constrained various “nontraditional” ARMs that had been common during the boom.

WHERE'S IT GOING? There currently are near-record numbers of both for-sale and for-rent housing units on the market, and the evolving wave of foreclosures on subprime and alt-A mortgages will be increasing the for-sale inventory and sending many home-owning households into the rental market. Furthermore, home buying affordability does not figure to rebound soon, given the evolving course of home prices, prime mortgage rates, and lending standards throughout the mortgage finance system.

Further erosion of the homeownership rate is virtually inevitable during the coming year.