Owning a home used to be a big part of the “American Dream” but household formation in the U.S. has fallen sharply over the past decade. Just look at the latest Residential Vacancies and Homeownership report from the Census Bureau, which showed that the seasonally adjusted U.S. homeownership rate ended the third quarter of 2016 at 63.5 percent. That is an increase from Q2 but housing typically outperforms during the summer months so an uptick in the third quarter is not too surprising. More importantly, the homeownership rate in America ended Q3 only slightly above the half-a-century low of 62.9 percent hit in the prior quarter.
There are several factors behind the large decline. For example, the financial crisis forced banks to drastically tighten their lending standards, which made it a lot harder for many Americans to get approved for a home loan. The economic recession that followed the financial crisis only exacerbated such problems for would-be homebuyers because many of these Americans lost their jobs, saw the value of their investments plummet, and as a result became less attractive to mortgage lenders. Fast-forward a few years and many of these headwinds have subsided as the recession is long over and U.S. households in general have experienced significant improvements in their personal finances, employment prospects, and overall access to credit.
Strangely, though, the homeownership rate has continued to drift lower throughout almost all of the recovery, and a poll from Gallup even found that fewer non-homeowners expect to buy a house in the future. What then is behind the continued decline in homeownership? Millennials are definitely playing a role because lots of young adults entering their prime working years have flocked to bigger cities in search of better job opportunities. Renting dominates such metropolitan areas so there likely will not be a big impulse to purchase homes until more of these young Americans start to get married and have kids.
Student loan debt is another factor depressing the homeownership rate because Millennials are by far the best-educated cohort of the workforce but many Gen-Y adults borrowed money to pay for college, and it is unlikely that some will proceed with a major financial transaction like purchasing a home before eliminating that liability. Even for those young adults who do not want to wait to buy a house, their student loan debt could hinder their ability to get financing, something which likely partially explains why all-cash home purchases remain elevated. What is worse is that student debt not only prevents many young adults from purchasing a home but also from starting their retirement savings early.
Indeed, a new report from Aon Hewitt found that 28 percent of surveyed U.S. adults said that they currently have an outstanding student loan. Respondents with such liabilities were found to be participating in employer-provided retirement plans at a lower rate than those without education-related debt, and therefore potentially missing out on full company matching contributions. Further, more than half (51 percent) of surveyed workers with student loans reported that they are contributing only 5 percent or less of their income to a retirement plan each year. Generation Z will likely have to deal with similar challenges given the rapid and relentless rise in tuition costs.
Sources: U.S. Census Bureau, Gallup, Wall Street Journal, Bloomberg, College Board, Aon Hewitt, FRBSLPost author: Charles Couch