American Dream & Reality

Homeownership in the United States has been in a slow and steady decline since reaching an all-time high of 69.2% in 2004. Defined as the percentage of homes that are owner-occupied (as opposed to the percentage of adults that own their own home), the homeownership rate declined to 65.1% in 2010, the lowest level since the mid-1990s. However, according to a recent study by Morgan Stanley, once delinquent mortgage borrowers are excluded, the effective homeownership rate is actually below 60%, which would represent the lowest level since the US Census Bureau began keeping quarterly statistics in 1965. The dwindling percentage doesn't fully explain the magnitude of the decrease of Americans owning homes, which, when using the 2010 number of occupied housing units, represents approximately 4.75 million housing units changing from owner-occupied to renter-occupied. Once those delinquent mortgage borrowers are factored in, the number of housing units no longer considered to be owner-occupied effectively rises above 11 million.

Conversely, and as would be expected, the rental market, the recipient of the benefits of a declining homeownership rate, has seen a marked uptick during this period. The vacancy rate for rentals fell to 9.2% in the second quarter of 2011, the lowest level since 2003.

Despite homes being more affordable than they've been in recent memory (as measured by the National Association of Realtors' Housing Affordability Index), mortgage rates being at near-record lows and an aging, growing segment of the population that historically has had higher homeownership percentages, the homeownership rate continues to decline. This decline is due to several contributing factors, including changing population demographics, a multitude of foreclosures and homebuyers' inability to access mortgages.

However, an arguably more important factor contributing to the decline is the lack of confidence in housing and the shattering of the public perception that housing is a safe investment. Whereas the public previously expected real estate to appreciate perpetually, the current downturn has irreparably crushed that myth. Nowhere is this change in perception more evident than in the government's response, advocating a policy of affordable-housing options (including rentals) rather than a policy of homeownership.

While some analysts feel that this housing decline is a symptom of Americans' changing attitudes toward homeownership and the gradual shift to becoming a nation of renters, others feel that we are nearing the bottom of the housing trough, and homeownership will begin to stabilize and increase. The truth as to what the future holds is likely somewhere in between.

For the foreseeable future, it is likely that landlords of multifamily and rental units will continue to reap the benefits of the reduced homeownership and rental vacancy rates. However, there is no quantitative benchmark more deeply ingrained in our society as synonymous with the American Dream than owning a house, whether for financial or familial reasons. Demonstrating the strong preference for homeownership, the NAR survey shows that 95% of homeowners and 72% of renters believe that "over a period of several years, it makes more sense to own a home than to rent," while 63% of homeowners and 65% of renters consider the financial and non-financial benefits of homeownership to be of equal importance.

Once the overall economy (particularly the job market) and residential real estate stabilizes, it is likely that homeownership rates will also stabilize. Nevertheless, this current downturn will cause homebuyers to be more cautious with any future purchase, and it would be more reasonable to expect homeownership rates to return to the 63-to-65% level that existed until 1995, when it surpassed 65%. While the housing market will almost definitely rebound over time with the general improvement in the economy, the extent and timing of such recovery will be heavily dependant on the public's perception of the future of the economy and governmental policies, including the accessibility of home mortgages, the level of conforming mortgages that can be purchased by Fannie Mae and Freddie Mac and the availability of federal tax incentives. But until this uncertainty is clarified and the overall economy starts to show growth, it is unlikely that the housing market will show much, if any, improvement or stabilization. In fact, it is likely that the trend of moving from homeownership to rentals will increase.

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