Academic journal article Cityscape

A Renter or Homeowner Nation?

Academic journal article Cityscape

A Renter or Homeowner Nation?

Article excerpt

Between the 1940s and the 1960s, the U.S. homeownership rate increased by nearly 20 percentage points, from mid-40 to mid-60 percent. The self-amortizing 30-year, fixed-rate mortgage, introduced by the Federal Housing Administration/Veterans Administration (VA-now the U.S. Department of Veterans Affairs) transformed the United States from a nation of renters to a nation of homeowners (Acolin and Wachter, 2015; Fetter, 2013).

For three decades, from the mid-1960s through the mid-1990s, the homeownership rate remained stable, at around 64 percent (U.S. Census Bureau, 2015a), until recent volatility. Although aggregate homeownership rates were remarkably steady, so were gaps across demographic groups. The "majority-minority" gap is about 20 percentage points (U.S. Census Bureau, 2015a). The persistence of this gap has important consequences for the national homeownership rate in the future, because the United States is expected to become a majority-minority nation in the next 20 years.1

In this article, we look back to explain the decades of homeownership stability and ask whether, after housing markets complete their recovery from the excesses of the housing market expansion and collapse, we will return to the post-WWII normal in which nearly two out of three households own or whether homeownership is likely to continue its postrecession fall over the coming decades, with an end result that we are no longer a nation of homeowners.

To be specific, this article addresses this proposition: "By 2050 the U.S. homeownership rate... will have fallen at least 20 percentage points." If this proposition is true, it will mean that within less than 40 years, the United States will transform once again, this time from a nation of homeowners to a nation of renters. Is this scenario possible? Is it likely? To address these questions, we undertake a forecasting exercise based on demographic predictions of the composition of U.S. households. In two separate scenarios, we assume the persistence of rents and prices and the lending conditions of 1990 to 2000 and 2000 to 2010, and we then assume a scenario of rising rents and prices to capture the possible impacts on homeownership of more recent trends in housing costs that may persist going forward. While it is not our base case, a set of circumstances exists under which the homeownership rate could fall below 50 percent.

The first section of this article reviews the literature on recent historical trends in the homeownership rate in aggregate and by region and demographic category. The second section describes baseline scenarios for homeownership, starting with a framework put forth by Goodman, Pendall, and Zhu (2015) and developing that to forecast homeownership to 2050. The third section discusses how rising rent trends may affect the base cases. A final section concludes.

Historical Changes in Homeownership, by Region and Demographic Group

After increasing from 44 to 62 percent between 1940 and 1960, the homeownership rate remained relatively stable through the 1990s (exhibit 1).2 It then increased from 64 to 69 percent between 1994 and 2004 and maintained that level until 2006 and fell back to 64 percent in 2009, declining to 63.4 percent in 2015.3 Both periods of stability and volatility are the outcomes of multiple and diverging demographic and economic forces. The literature on homeownership emphasizes both the role of demographic changes that occur over the long run and of market forces that can result in relatively fast adjustments (Fetter, 2013; Gabriel and Rosenthal, 2005, 2015; Goodman, Pendall, and Zhu, 2015; Green, 1996).

Fetter (2013) provided evidence of the role of changes in the mortgage market in the rise in homeownership rate that occurred in the post-WWII period. This increase took place in part through households' accessing homeownership earlier in the lifecycle (exhibit 2) as shown by the shift from a linear to a concave relationship between age and the homeownership rate during that period. …

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