How is the U.S. Homeownership Rate Climbing to 11-Year Highs?
One of the great housing myths is that the homeownership rate in the U.S. is going down due to higher home prices, higher mortgage rates and increased investor purchases of single-family homes.
But the data just does not support the narrative. Homeownership continues to climb, reaching 66% in 2022’s 3rd quarter, which marked the highest level since 2011 (excluding the blip of 2020, when the Census had data collection problems due to the pandemic). Homeownership increased 60 bps over the last two quarters and it’s now jumped up 310 bps since 2016.
The uptick comes even as the premium to buy versus rent has widened to the highest level in decades, as rents have come nowhere close to keeping up with home purchase costs.
Why is that? How can homeownership continue its upward ascent given the parade of headlines telling us that higher mortgage rates and even “robot landlords” are pushing homeownership “out of reach.” We’ve even seen headlines speculating that higher rents are leaving people unable to save for a down payment.
Here are a few observations:
1. Consumers are More Resilient Than Headlines Suggest
First and foremost: U.S. consumers are generally proving to be far more resilient than headlines and narratives suggest. We’ve seen this across the board – not only in terms of homeownership, but also in consumer spending (see the big Black Friday shopping results?) and even renters paying rent every month.
We’re also seeing this play out in terms of homeownership. Of course, there are always exceptions. Not every want-to-be homebuyer can buy a home, but that’s always been true – even long prior to the pandemic. In fairness to the headlines, the anecdotes they cite are very real. But that doesn’t mean they’re representative of broader trends.
Here’s what the data tells us: Owner-occupants continue to represent the vast majority of homebuyers, despite the boogeyman paranoia around investors. Individual homebuyers are not only driving up homeownership, but unlike the mid-2000s, they're doing it with much lower-risk mortgages ... so foreclosures remain tiny. Consumers remain resilient.
2. Owner-Occupants are Gaining Market Share from Investors
This is a trend that has gone very under-reported, but the number of investor-owned homes occupied by renters fell by 200,000 between 2019 and 2021, as real estate investment group Pretium noted from analyzing U.S. Census data. At the same time, the number of owner-occupied homes jumped by 4.5 million.
How could that be possible given that we know many investors have been active buyers in recent years? As Pretium and others have noted, somewhere around 97% of single-family rentals are owned by smaller investors (i.e. families or “mom and pops”), and it appears a sizable chunk chose to sell as home prices surged in 2020 and 2021.
3. Rentals are Not Benefiting from Higher Mortgage Rates
As mortgage rates started increasing earlier this year, many analysts speculated that rentals would see a surge in demand among would-be buyers. But that was never a sound theory, and sure enough, it hasn’t panned out. For-sale and for-rent demand tend to move together (as they did on the upswing of 2021 and downswing of 2022). Home sales have dropped off in 2022, but so has rental demand.
All housing is dependent on household formation for net new housing demand, and there’s just little household formation occurring in 2022 given weak consumer confidence. People are staying put wherever they are. That’s likely helping keep rental turnover at low levels (and feeding a “lock-in” effect among homeowners who might otherwise relocate), but it’s certainly not creating new renter households.
The flawed theory stems from the conventional wisdom that rentals compete with for-sale homes. But that tends to be grossly overstated, and history shows us that demand tends to be tightly aligned between the two sectors.
4. Household Consolidation Impacts Rentals Most
One reason why homeownership went up in 2022 – despite weakening demand for both for-sale and for-rent homes – could be the stickiness factor of homeownership. Few people are selling their homes to relocate, and higher rates add another complication that (in the short term) could keep homeowners in place.
By comparison, rental turnover is naturally higher – even if turnover is still abnormally low by rental housing's historical standards. People often talk about “doubling up” by necessity, but most doubling up is simply due to normal household consolidation among young adults more likely to be renters – such as cohabitations and marriages. (In fact, weddings in 2022 are reportedly at highest levels since 1984.)
These were always factors for rental turnover, but become more impactful when new-lease demand totally freezes up – as it has in 2022.
Bottom line: The homeownership rate is tied to household formation, which has stalled out in 2022, but the net impact seems to tilt in the favor of homeownership due to factors above. But if the job market remains strong into 2023, we could see demand first return to rentals given fewer frictional barriers to entry. That might be a short-term counterweight to the upward trend in homeownership.
5. More Millennials are Becoming Homeowners
Another big reason for the rising homeownership rate: Demographics. America’s largest generation of adults is aging up into a homeowner stage of life. The Millennial homeownership rate has climbed for four straight quarters. As expected, more Millennials (who some analysts wrongly pegged as never-buyers) are choosing to buy homes just as their parents did, even if “delayed adulthood” trends mean waiting longer to get there.
Of course, more Millennial buyers does not mean bad news for rentals. Remember that every day someone turns 40, someone else is turning 20. The generation after Millennials, Gen Z, is quite large, too, and they’re emerging as the key apartment demographic.