The declining of the homeownership rate in the United States ignited concerns regarding the condition of the recovery of the housing market. Goldman Sachs Research argued that the situation may be good news for the housing market if it is caused by higher household formation.
Goldman Sachs Research said the declining homeownership rate is comparable to the rising unemployment rate, which may be deemed encouraging news for the labor market if it is driven by higher labor force participation.
Fourth quarter 2014 homeownership rate
The Department of Commerce Census Bureau reported that the country’s homeownership rate was 64% in the fourth quarter of 2014, which is 1.2% lower than 65.2% in the same period in 2013.
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The Census Bureau reported that the national vacancy rates for rental housing were 7% and 1.9% for homeowner housing during the fourth quarter last year.
Data showed that the homeownership rate was the lowest in 20 years. Goldman Sachs noted that the speed of the decline appeared faster between 2013 and 2014. The 1.2% drop was the largest since the bureau started recording the homeownership rate in 1980.
Housing market recovery is ongoing
Goldman Sachs Research believed that the declining homeownership rate does not mean that the housing market recovery is slowing. The research firm explained that the homeownership rates could be low or high for the right or wrong reason.
The research firm explained, “Mathematically, homeownership rate is the ratio of the number of home-owning households to the total number of households.”
Goldman Sachs said the housing demand is weak if a low ownership rate was caused by a small numerator such as fewer home-owning households. On the other hand, if a low homeownership rate is driven by a large denominator such as more households, it indicates a strong housing demand.
To clarify its point, Goldman Sachs further explained, “If there only one household in the economy and this household owns its home; the homeownership rate would be 100%, but the total housing demand is only one unit. If there is one million household in the economy and all of them rent, the homeownership rate is 0%, but the total housing demand is one million units. In this extreme example, the 0% rate implies much higher aggregate housing demand than 100% homeownership rate.”
Goldman Sachs Research noted that the latest decline in the homeownership rate was due to the increasing number of renters than the decreasing number of homeowners.
The research firm emphasized that the situation supports its view that the U.S. housing recovery is ongoing. It also expects the household formation and homebuilding to normalize over the coming years.