May 10, 2016

Owning or Renting in the US: Shifting Dynamics of the Housing Market

By: Susan Wachter and Arthur Acolin
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The U.S. homeownership rate is now at 63.7 percent, a 48 year low. Since 2006, 8 million more households rent, while the number of households who own has declined by 674,000. While much of the economy has rebounded from the Great Recession of 2009, seven years later, homeownership has stalled. Except for the Great Depression, this persistent and large decline in the number of owner households is unprecedented. Why has this occurred? What is driving the economy of renting?

The table, from the US Census, in the accompanying Research Brief, puts numbers behind this shift. Homeownership rates have decreased for all household age groups. Declines have been particularly pronounced among the young, with homeownership declining from 55 to 45 percent among households age 25 to 39.

A key question is whether the shift towards renting across most age groups is the result of changing preferences. Or are new hard financial realities driving the declines?

Our research suggests that the latter is true. In fact, households continue to aspire to become homeowners today much as they have in the past. According to recent survey data, (NAR, 2015), 83 percent of renters express a desire to own. And a full 94 percent of young renters (age 34 or younger) desire to be homeowners.

While becoming homeowners may be optimal for these households, the financial barriers to doing so are increasing. Post-crisis, major banks have pulled back from lending for mortgages through government programs by imposing their own more stringent requirements. As a result, the actual ability to access lending has declined relative to historic standards despite the fact that mortgage lending rates are at all-time lows and affordability, using traditional measures, is seemingly high.

Many households are renting out of financial necessity rather than by choice. In newly published work, we show the impact of post-crisis borrowing constraints on current homeownership rates. A large body of research demonstrates the important role of lending constraints on changes in homeownership outcomes over time. Our research tests for the impact of these changes on today’s homeownership outcomes.

Over the years 2009 to 2014, 5.2 million more mortgage loans would have been made if credit standards were at levels similar to those in 2001 (before the credit boom). In our work we quantify how much of the decline in homeownership directly relates to this tightening of credit standards. We find that the homeownership rate in 2010-2013 is predicted to be 2.3 percentage points lower today than if the constraints were set at the 2001 level. Put in another way, the national homeownership rate, today, as noted above, at, 63.7%, would be 2.3% higher if constraints were at 2001 rather than 2010-13 levels. In the absence of these new constraints, the homeownership rate would be at historical post WW II levels.

Because the demographic groups most subject to borrowing constraints are increasing as a share of the population, we find that, if lending conditions persist, their impact on the aggregate homeownership rate will likely increase over time. Moreover, over the longer run, additional economic factors may push homeownership rates lower. In particular, revitalizing cities and population gains in high priced and high job growth metros are increasing housing prices in these areas. Scenarios that include the possible combined effects of financial constraints, rising housing costs and demographic shifts show declines in aggregate homeownership rates of 10%.

The cause of the homeownership declines matters as much as the fact that they are occurring. If it is financial constraints rather than preferences that are yielding the homeownership outcomes we observe, then the advantages of being able to choose ownership are precluded for some. Revitalizing cities and increased urban amenities are generally viewed as good outcomes and, for owners, they are good: owners can stay and benefit from the appreciation of their homes in these settings. Renters, however, face higher rents and resulting shelter instability. The potential social consequences of this instability point to the new importance of attention to causes of the current decline in homeownership and the reconsideration of mitigating policies toward the goal of sustainable homeownership and affordable housing for the long run.

For more information, read the full brief available on Penn IUR’s website. 

Arthur Acolin is a Ph.D. candidate at the University of Southern California Price School of Public Policy and Susan Wachter is Co-Director of Penn IUR, Sussman Professor of Real Estate and Professor of Finance at the Wharton School. 

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