The homeownership rate is exactly what it sounds like it is. It is a percentage of homes that are occupied by their owners. It should not be interpreted as the percentage of adults who own a home. This may be a little confusing, so I’ve come up with an illustration to help distinguish the difference.

Defining Homeownership

Imagine a world in which there are only 4 homes and 4 families. For the sake of argument, let all family member be adults. Listed below are family characteristics and living situations.

Family 1 – 2 people. They live in Home 1, in which one of the family members is an owner.

Family 2 – 3 people. They live in Home 2, in which one family member is an owner.

Family 3 – 4 people. They live in Home 3, but no occupants own the home they live in. It is owned by someone from Family 1.

Family 4 – 6 people. They live in Home 4, in which two family members own the home they live in.

In this pseudo housing market, using the correct definition of homeownership, the homeownership rate is 75%. This is because 3 of the 4 available houses are occupied by families in which at least one member is an owner. If homeownership is calculated by the percentage of adults who own a home, then we would calculate the homeownership rate to be 33%. This is because 5 adults out of 15 adults own a home. This example illustrates the importance of defining homeownership accurately since the difference between 75% and 33% is substantial.

According to the U.S. Census Bureau, the homeownership rate in the United States in 2017 is 63.7%. According to Prashant Gopal of Bloomberg, this is the lowest homeownership rate since 1965, the year when the U.S. Census Bureau began recording this statistic. A low homeownership rate, especially following a housing crisis, explains the effects of numerous macroeconomic and microeconomic activity. Traditionally a lower homeowner rate was seen as a bad thing since it meant increased mortgage foreclosures and defaults on loans, which is usually translated to be a result of low economic growth and excessive interest rates. The truth of the matter is that this current drop in homeownership is due to an improved job market, tighter credit allowances for borrowers, slower construction of new homes, and changes in demographic preferences.

  1. Increased Rental Rates due to Improved Job Market

Ralph McLaughlin, chief economist for data provider Trulia, says that “renter households are growing at a faster rate than owner households, which reflects growing confidence of those who were most likely impacted by the foreclosure crisis.” In addition, more young people are leaving their parents’ homes and entering the rental market, diluting the number of owner-occupied households. This phenomenon explains an improving job market in the U.S., because more young people are able to find jobs that will provide enough income for financial independence. Renting has been chosen as the method of living by newly financially independent young people, which is expected to decrease homeownership rates.

2. More Equity for Homeowners: More Protection Against Volatile Markets

After the destructive effects of the housing market crash in 2008, banks have tightened their credit lines and have reduced distribution of federally backed, low-money-down mortgages. While this raises the price of buying a home, it also acts as a barrier of entry for the housing market, strengthening existing homeowner equity. Indeed, this does not help the case of wealth inequality since its harder for lower income families to afford a new home. There is now more equity on a per-household basis, meaning that current homeowner’s tenure is that much more sustainable and secure. The U.S. has more homeownership in economic terms than it did when the homeownership rate, defined in legal terms, was higher. Thus, the economy should be less vulnerable to another real estate shock.

3. Slow Down of Housing Construction: A Time for Environmentally Friendly Homes

According to The Federal Reserve Bank of St. Louis, the past decade has seen a steady decline in newly built homes.

I believe that this intentional decline in construction is due to the growing idea of incorporating “sustainable development” in private homes. Housing construction has temporarily stopped to research and evaluate a new and emerging market, not to mention distrust of the housing market due to the crash. This is a great thing for homeowners because “greener” building design reduces their long-run energy costs and dependence on monopolized utility firms. Additionally, better building design usually relates to increased lifetimes of the building in question, providing the opportunity to for investors to make decisions with a longer time horizons.

4. Changing Demographics: Increased Old-Age Population Driving Down Homeowner Rates

All households must be owned or rented. Homeownership is the percentage of households owned, in which an occupant is an owner. This rate can be misleading because people have another option: living under someone else’s roof. When young adults live with their parents, or older people live with their grown children, or people live with housemates, they count as part of someone else’s household. It omits people who are not in the housing market themselves as owners or renters.

As the aging population increases, there is increased demand for care. Usually these older people look to their immediate family for support. At a certain age, it becomes nearly impossible to care for oneself, as the body and mind become weak and feeble. In the United States, many elders move back in with their children. Previously homeowners, these elders put their homes on the market for the purpose of selling to another homeowner, or a prospective landlord. If sold to a landlord, the homeowner rate will decrease, since the home previously owned by the elder becomes a home that is rented.




How to Interpret the Homeownership Rate: Is It an Accurate Indicator of Economic Quality in The U.S.?