| Implications of Declining Home Ownership |
| Written by Jonathan Smoke | |
| 08.08.2007 | |
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Discuss this article on the forums. (0 posts) On Monday I reviewed more details on the key change now fundamentally impacting the demand for housing: the reversal of gains in home ownership that occurred from 1995 – 2005. So what are the implications? Clearly the loss of speculators in the market and the corresponding dumping of investment properties have caused some of the inventory hang-over issue impacting most markets. But something more fundamental and serious for the long-term environment is afoot. Ownership rates have reversed. Interest rates have increased somewhat. More significant, home prices changed from an ally to an enemy of the ARM and interest-only borrower. With home prices flat or falling, they no longer rescue buyers unable to make payments. Instead, they can cause the buyers to have negative equity. Since many of these types of borrowers are young households and/or income or affordability challenged, they are forced out of homeownership. When this happens, their demand is gone from the housing market, and their existing homes become further inventory. With credit tight, interest rates higher, and consumer psychology now “once bitten, twice shy,” the decline in home ownership is likely to continue. How far will it fall? The average rate since 1990 is 66.6%. So far, we’ve fallen 40% towards that mean. As illustrated in the chart, during the last 20 years, new home sales have tracked ownership rate changes more closely than household growth. And, albeit with some lag, new home sales decline when ownership rates drop. As ownership rates increased over the last 15 years, the industry benefited from household growth and the huge gain in new homes needed by previously renting households. As ownership rates decline, the impact on demand is similar, only in reverse. There is a slight reduction in the number of new households that need housing. But there is a huge negative impact caused by existing households no longer needing/requiring/affording housing as owners. In the next post on this topic, I’ll dig into the numbers to see what this likely means for new homes sales on a national level. 
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