The latest data from the U.S. Census Bureau reveals a 63.9% homeownership rate, which is the lowest level in 20 years. The homeownership rate is set to slide further over the next two years before stabilizing, notes Goldman Sachs.
Hui Shan and team at Goldman Sachs in their April 15, 2015 research report titled: “Demographics support homeownership, tight credit does not” points out that demographics are supportive of increased housing demand in the U.S., including both household formation and homeownership.
Homeownership rate to bottom in 2016
The Goldman Sachs analysts point out that after peaking at 69.4% in 2004, the homeownership rate in the U.S. has been declining for a decade. In their research report, the analysts provide insight into the equilibrium homeownership rate through a model that incorporates four factors. Based on their analysis, they project the homeownership rate to drop further over the next two years, bottoming at 63.5% in 2016, and to remain flat for some time thereafter:
For their analysis, Hui Shan and team considered four factors, including age and race/ethnicity dimensions of demographics, cyclical factors such as labor market condition and mortgage lending standards.
The analysts highlight that demographics play an important role in determining the homeownership rate. For instance, as depicted in the following graph, older households are more likely to own homes than younger households, while on the other hand, minority households are less likely to own homes:
The analysts point out that the homeownership rate among older households has been trending up over the past 40 years, presumably due to rising longevity, while the homeownership rate among younger households has been trending down during the same period, likely due to increased schooling. Moreover, both Hispanic and non-Hispanic households appear to be experiencing an upward trend in homeownership rate over the past four decades:
The Goldman Sachs analysts note that apart from demographics, cyclical drivers such as labor market conditions and mortgage lending standards are also important in determining household formation and the homeownership rate. For example, young adults are more likely to live independently rather than live with their parents when labor market conditions are good.
Forecasting homeownership rate in three steps
Shan and team at Goldman Sachs combine the Current Population Survey (CPS) with the census population projection to forecast the homeownership rate in three steps.
As a first step, the analysts divided the U.S. adult population into 28 demographic groups with 7 age groups interacted with 4 race/ethnicity groups. For each of the 28 demographic groups, the analysts derived the head-to-population ratio and the owner-to-population ratio using the 1976-2014 CPS data.
In the second step, the analysts estimate two equations with both the equations explaining the dependent variable using labor market conditions, mortgage lending standards and time trends. They point out that labor market conditions matter the most for household formation among individuals of age 18-34, while mortgage lending appears to be most influential to homeownership of the 25-34 year olds:
As part of their third step, they applied the Census population projection to the head-to-population and owner-to-population predictions to arrive at a forecast of the total number of households and a forecast of the total number of homeowners.
The analysts highlight that their model output points to an annual household formation of 1.5 million, of which 1.0 million are homeowners, implying a stabilizing homeownership rate.
Shan et al. also point out that demographics are supportive of housing demand in the U.S., including both household formation and homeownership:
The Goldman Sachs team also note factors such as the foreclosure crisis and ballooning student debt are likely to persist, placing continued downward pressure on the homeownership rate. The analysts note the U.S. housing market needs more time to fight off the near-term headwinds before the favorable demographic forces can take hold.
