Housing Market Picture Hasn’t Changed but Fed’s Interest Rate Strategy Might

What’s happening in the housing market?  The answer to that question hasn’t changed much in the past several months. 

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Is home ownership dead? Harvard’s Joint Center for Housing Studies provoked that question with a report analyzing the continuing decline in the nation’s home ownership rate. The analysis, in the Center’s annual “State of the Nation’s Housing” report, identified several factors responsible for the downward ownership trend, and concluded that it’s not going to be reversed any time soon.

The ownership rate sank to 63.7 percent last year from a high of 69 percent in 2004, wiping out all of the ownership gains recorded over the past 25 years. The ownership rate for people between the ages of 35 and 41 – traditionally prime home ownership years – hasn’t been this low since the 1960s, the report notes.

As the ranks of homeowners have shrunk, the rental population has soared, growing last year at the fastest pace in more than 30 years. An increasing proportion of those renters have been older, between 45 and 61 – an age cohort traditionally dominated by homeowners. And many of these renters are in the upper-income range – nearly one-third have come from the wealthiest quarter of the population, the report notes.

A Rebalancing Under Way

“We do think we are in the latter stages of a rebalancing between owning and renting," Douglas Duncan, chief economist for Fannie Mae, said in a CNBC interview.

The last recession and the deep housing market collapse that helped trigger it are largely responsible for that shift, the Joint Center report suggests. Among other residual effects of the downturn:

  • Young adults unable to find jobs in a weakened economy, delayed plans to create households of their own, depleting what should have been a growing population of homeowners.
  • Many former home owners, who lost their homes to foreclosure, have been unable or unwilling to re-enter the housing market, constrained by impaired credit, limited equity, or both.
  • The foreclosure crisis has made many prospective buyers, who could afford to purchase homes, gun-shy about homeownership.
  • Rising household formation rates will theoretically boost home ownership rates over the next decade, but most of that growth will come increasingly from minorities, who have traditionally had lower incomes and less ability to purchase homes.

Former homeowners who can’t buy homes and first-time buyers, who are reluctant to do so, have been filling existing apartment buildings. A growing cohort of baby boomers, looking to shed the burdens of homeownership, is opting to rent as well.

Rental Pressures Growing

The increasing demand for rental units is putting upward pressure on rents, which rose at nearly twice the inflation rate last year. According to the report, almost half of all renters last year met the definition of cost-burdened – paying more than 30 percent of their income for rent. And that trend is creating another impediment to home ownership: Forced to pay an increasing proportion of their income for rent, prospective first-time buyers, who might like to enter the housing market, have been unable to amass the down payment they need.

Robert Shiller, an economics professor at Yale University and co-creator of the Case-Shiller housing index, sees current demographic trends creating “a new normal” for the housing market. “We went through a wrenching experience with the housing bubble [followed by] the biggest collapse since the 1890s,” he told the New York Times.

Chris Herbert, managing director of the Harvard’s Joint Center, suggests a more fundamental question: Not whether there is a “new normal” for home ownership, but what a “normal” homeownership rate should be. “No one knows the answer to that question,” he said in an interview with the Washington Post. “At some level, what it comes down to is how many people would like to own ─ who actually, objectively have the ability to own, in the sense of being able to sustain it ― and can’t. We don’t know.”

However that academic question is answered, the practical implications for the housing market are clear. “Between the record level of rent burdens and the plunging home ownership rate,” the Joint Center report notes, “there is a pressing need to prioritize the nation’s housing challenges over the coming years, if the country is to make progress toward the national goal of secure, decent and affordable housing for all.”


Here’s a brief recap of the June economic reports:

  • Employers added 223,000 jobs for the month but wage gains remained anemic, leaving the timing of the Fed’s interest rate move still in doubt.
  • The unemployment rate dropped to 5.3 percent – its lowest rate in 7 years – but the decline came because more people are finding jobs but because they are giving up on the prospect of doing so. The participation rate declined by another 0l.3 percent to 62.6 percent; the participation rate for workers between 25 and 54 hasn’t budged at all this year.
  • Existing home sales rebounded strongly in May after an April swoon, increasing by 5.1 percent for the month and by more than 9 percent year-over year. Pending home sales, measured by a National Association of Realtors reached their highest level in 9 years – posting their ninth consecutive year-over year gain.
  • New home sales soared, rising nearly 20 percent above the year-ago level to a seasonally adjusted 546,000 units. Permits for new construction increased by nearly 12 percent to a seasonally adjusted annual rate of 1.28 million units – exceeding the 1 million mark for the second consecutive month and persuading some analysts that the housing recovery is on a sustainable path. Chris Rupkey, chief financial economist at MUFG Union Bank in New York, is among them. He told the New York Times: “Residential construction has been the laggard in this recovery, and the moonshot surge in new permits today means the final piece of the recovery puzzle is now falling into place.”