A different perspective on homeownership

By: J. David Chapman/February 23, 2017

Today, 4 out of 10 Americans are renting instead of owning a home. With homeownership dropping to 62.9 percent, or the same as it was in 1965, the U.S. demand for rental property is at an all-time high.

I would caution us to be skeptical of reports on why this switch from ownership to renting is occurring. Many blame the economy and the usual homeownership hurdles such as student loan debt burdens, low credit availability, and home affordability.

The economy has expanded for 28 straight quarters, added more than 13 million new jobs since the end of the recession and reduced the unemployment rate to below 5 percent; however, it is not expanding fast enough. We need more new jobs and typically new jobs are not paying well enough, but the lingering effects of the economic crisis on homeownership seven years after the recession is tough to prove.

A common theory is that impediments to homeownership include the burden of student debt. Research shows that the extra earnings per month that come with having a degree ($750) is higher than borrowers’ average student loan payments of $400 per month. College is still worth it and most experts agree that if you graduate, you will be better able to pay a mortgage than if you had no debt and no degree.

The affordability argument does not hold water either, based on the Real House Price Index, which measures the price of houses adjusted for the impact of income and interest rate changes on homebuying power. Based on this index, homes are 40 percent less expensive than they were at the housing peak. Therefore, purchasing power of record low mortgage rates is more than offsetting the high prices.

So just like my generation has become accustomed to doing, should we blame the millennial generation? Well, actually, maybe we should. Since the beginning of the recession, the amount of rental households has increased by 22 percent. That accounts for 8.4 million new rental households. In contrast, there are 2 percent fewer owner-occupied households today. That’s 1.5 million fewer owner-occupied households. This is an issue, but not the reason homeownership is lower. The homeownership rate is so low because there are so many more millennial renters – not because we have lost millions of homeowners. Does this change your perspective?

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).