Jed Kolko is chief economist and vice president for analytics at Trulia, an online marketplace for residential real estate.
On Friday, the Census Bureau will remind us that the homeownership rate is at or near an 18-year low. After rising to an all-time high of 69.2 percent in 2005 near the height of the housing bubble, the homeownership rate fell to 64.9 percent in 2013, the lowest level since 1995. This drop represents millions of people who lost homes to foreclosure, can’t get a mortgage or haven’t been able to save for a down payment. Furthermore, the homeownership rate is likely to fall further before hitting bottom. Shouldn’t we be panicking that the American dream of homeownership is drifting out of reach?
Nope. At this stage of the housing recovery, the falling homeownership rate turns out to be misleading. In fact, for young adults, who were hit especially hard in the recession and housing crisis, the decline in their homeownership rate might paradoxically be a sign of improvement. The rate can mislead in the other direction, too: During the worst of the housing crisis, the falling homeownership rate clearly understated the damage done.
Source: Current Population Survey, Annual Social and Economic Supplement (Census Bureau and Bureau of Labor Statistics).
Let me explain. Households can be one of two things: owners or renters. The homeownership rate equals the share of households that are owners. But look at people instead of households, and people have a third option: living under someone else’s roof. When young adults live with their parents, or older people live with their grown children, or people live with housemates, they count as part of someone else’s household. Those people are technically neither owners nor renters, and they don’t count in the homeownership rate. That’s why the homeownership rate can mislead: It omits people who are not in the housing market themselves as owners or renters.
This is similar to the better-known shortcoming of the unemployment rate, which doesn’t count people who are “not in the labor force” for various reasons, including having given up looking. As we know, the unemployment rate understated the weakness in the job market during and after the recession because more people dropped out of the labor force. To get the full view of the job market, economists look not only at the unemployment rate, but also at labor force participation.
A simple illustration shows how the homeownership rate can mislead. Suppose you have 10 friends, each living alone; five own their homes and five rent. The homeownership rate among this group is 50 percent. Then, one homeowner loses the house to foreclosure, and three renters lose their jobs and can’t afford to keep their own apartment. These four people all move in with one of the remaining homeowners. Now there remain four homeowners (one of whom is doing lots of laundry and dishes) and two renters, which means the homeownership rate went up to four out of six, or 67 percent. The homeownership rate missed the real story, which is that four of 10 dropped out of the housing market and are now couch-surfing.
When the homeownership rate steers us wrong, the “headship rate” — housing’s answer to the labor force participation rate – can come to the rescue. It’s the percent of adults who head a household. Put another way, it is the ratio of households to adults. If there are 200 million adults living in 100 million households, the headship rate is 50 percent. A higher headship rate means fewer adults, on average, per household. Over the longer term, demographics explain shifts in the headship rate (and in labor force participation, for that matter). An aging population, for instance, typically increases the headship rate because older adults are more likely to head their household than younger adults are because many young adults live in their parents’ home or with housemates.
In the short term, though, economic swings affect the headship rate, just as they affect labor force participation. When people lose their home to foreclosure or can no longer pay the rent and move in with someone else, the headship rate falls. When they get back on their economic feet and move out of their parents’ or roommate’s home into their own place – either as an owner or a renter – the headship rate rises.
Let’s go to the numbers. The headship rate can be calculated from two different government surveys, the Annual Social and Economic Supplement of the Current Population Survey, a joint project of the Census Bureau and the Bureau of Labor Statistics, and the American Community Survey compiled by the Census Bureau. To the frustration of housing economists, these surveys sometimes show inconsistent trends. Among other differences, the latest Current Population Survey is more recent, but the American Community Survey is based on a much larger sample.
Sources: Current Population Survey, Annual Social and Economic Supplement (Census Bureau and Bureau of Labor Statistics) and American Community Survey (Census Bureau).
The headship rate peaked just before the height of the housing bubble, reaching 52.3 percent in 2003 and then falling to 51.2 percent in 2010, according to the Current Population Survey; the American Community Survey showed a similar decline over the period 2006-10. That drop in the headship rate translates into 2.5 million fewer households in 2010 than there would have been if the headship rate hadn’t fallen. That means that the decline in actual homeownership was steeper than the homeownership rate alone showed. The rate fell by 3.2 percent, but the actual share of all adults who owned a home dropped 4.9 percent — half again as much – because people dropped out of the housing market altogether.
Since 2010, the trend in the headship rate is murkier. The Current Population Survey shows an increase in the headship rate in 2011, 2012 and 2013, while the American Community Survey shows continued decline in 2011 and a near-flattening in 2012, the most recent survey. That means people have either started returning to the housing market or, at least, are dropping out at a slower rate.
Looking at the headship rate is especially important to understand what happened to young adults. The headship rate for 18- to 34-year-olds dropped three times as much as for adults over all, largely because the share living with their parents climbed to the highest level in decades. But this trend has either slowed or reversed. The survey shows that the number of young homeowners has stabilized (adjusting for population growth), and the number of young renters rose by 3 percent as young adults have slowly begun to move out of others’ homes and re-enter the housing market from 2011 to 2013. (The American Community Survey shows their headship rate still falling through 2012, but by less than in the several years prior.)
In fact, the headship rate is the key to how much the housing recovery contributes to economic growth. The headship rate and the population determine the total number of households, so a rise in the headship rate means more new households, all else equal. New household formation stimulates construction activity, and construction adds jobs and investment to the economy. Builders have already increased construction to keep pace with new rental demand: 2013 saw construction begin on the most new rental apartment units in 15 years.
Headship is poised to increase. Young adults still living with their parents won’t do so forever, and the Current Population Survey headship rate in 2013 – even with its recent rise — is still below its 20-year average. That will prompt more new construction. Of course, an increasing headship rate isn’t necessarily a good thing: at the extreme, a 100 percent headship rate would mean that each adult has his or her own household, either alone or with children. That would make for a huge construction boom but a lot of loneliness. Age, marital patterns and even cultural preferences all affect living patterns: Among those 65 or older in the United States, for instance, the foreign-born are four times as likely as the native-born to live with relatives rather than in their own household.
How soon will homeownership recover? It depends on job and income growth, mortgage credit availability, affordability and more. But today, since many young adults are still living with their parents, let’s watch first for an increase in the headship rate. And we should not be alarmed by the falling homeownership rate if it’s falling because people are renting their own place instead of living in someone else’s.