Homeownership dips to 35-year low: Why economists are optimistic

Still rebounding from the recession, homeownership declined to its lowest point since 1980, while the rental market and housing prices both surge, according to data from the Census Bureau. 

US homeownership reached a 35-year low, according to numbers released Tuesday by the Census Bureau.

The homeownership rate fell to 63.5 percent, down from 63.8 percent in the first quarter, the lowest rate since 1980, when the department began seasonally adjusting the vacancy rates. The unadjusted series goes back to 1965. The homeownership rate peaked at 69.4 percent in 2004, according to Reuters.

Potential homebuyers have been sidelined by tougher post-recession mortgage terms, and salaries, on average, have not kept pace with spiking home prices. The average household income in June was 4 percent below a record high set in early 2008, even as unemployment dropped to its pre-recession rate, according to Sentier Research LLC, Bloomberg reports.

Economists are optimistic that the tightening job market will increase wages, and make home buyers out of current renters. The unemployment rate is at a seven-year low of 5.3 percent, close to the 5.0 percent to 5.2 percent range that most Federal Reserve officials consider consistent with full employment, Reuters reports.

"The trend is not going to continue. We think that the homeownership rate is close to bottoming out, but we don't expect it to start rising substantially before 2017," says Andres Carbacho-Burgos, a senior economist at Moody's Analytics in West Chester, Pennsylvania, in an interview with Reuters.

He cited a tightening labor market as one of the main reasons to be optimistic about housing.

Demand for rentals is growing, and leasing costs are increasing along with it. The Census Bureau report showed the number of renter-occupied units increased by about 2 million in the second quarter from a year earlier.

The rental vacancy rate fell to 6.8 percent, the lowest rate since the 1980s, according to the report. The median asking rent was a record $803 a month, according to Bloomberg.

“Growth in the housing market is closely tied to what economists call “household formation,” or when a person leaves his or her family home and becomes a separate unit, says Mark Fleming, chief housing economist for the insurance firm First American, in an interview with The Christian Science Monitor. He notes household formation by Millennials has ramped up, but virtually all of those new households are renting.

“We’ve created barely any new owned households,” he says, but that makes sense with the priorities of most young adults. “One of the primary reasons is mobility. When you’re younger, you’re not sure where you want to live yet, and it’s more expensive to sell a house than to [end a rental agreement].”

“[Millennials are] a bigger generation than the Baby Boomers, so anything they do en masse is really going to swing the market,” Fleming says.