FRBSF Economic Letter
2006-30; November 3, 2006
The Rise in Homeownership
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 After decades
of relative stability, the rate of U.S. homeownership began
to surge in the mid-1990s, rising from 64% in 1994 to a peak
of 69% in 2004, near which it has hovered ever since; this
translates into 12 million more homeowners over the period
(Figure 1). Understanding the forces behind such trends in
homeownership is important not only because supporting homeownership
has been an unequivocal public policy goal for decades but
also because homes are an important part of people's net worth
and, therefore, can affect their spending, working, and saving
decisions.
In this Economic Letter, we examine several potential reasons for this surge
in the homeownership rate. We find that, while demographic
changes have some role to play, it is likely that much of the
increase is due to innovations in the mortgage finance industry
that may have helped a large number of households buy homes
more easily than they could have a decade ago.
The importance
of homeownership and basic facts
Homeownership
has frequently been cited as an integral feature of the American
Dream and, indeed, a host of government policies have been
enacted over the decades to encourage it. For instance, the
federal government established a number of agencies specifically
designed to increase access to credit for purchasing homes,
including the Rural Housing Service, the Federal Housing Administration,
and the Federal Home Loan Banks. Additionally, homeowners enjoy
a host of tax benefits, including deductions for mortgage interest
and real estate taxes, as well as a sizable exclusion on capital
gains from home sales.
From the homeowner's
point of view, the decisions of whether, when, and how to purchase
a home are important, as they significantly affect the household's
balance sheet and other financial decisions. Bucks, Kennickell,
and Moore (2006) report that in 2004 primary residences accounted
for 32% of total family assets, and the debt secured by those
residences accounted for 75% of total family debt. Paying back
mortgages and home equity loans can be a significant burden
on households; for example, the median household in 2004 with
any property debt devoted 17% of its pretax income to servicing
that debt (Doms and Motika 2006). The home's importance as
an asset has been especially visible during the recent run-up
in house prices, as homeowners have tapped into the increased
equity in their homes to boost consumption.
The role of demographic
changes
 To
explore the role of changing demographics in the increase in
the U.S. homeownership rate, we first look at broad trends
between 1994 and 2004 using data from the Current Population
Survey, which is conducted by the Bureau of Labor Statistics.
Figure 2 breaks the population into three age groups, and the
results confirm the well-known fact that the age distribution
has shifted as the baby boom generation has moved up the age
scale. Figure 3 shows the changes in homeownership rates
within these three age groups, and, as expected, it shows that
households
headed by older people are more likely to be homeowners; it
also shows that homeownership rates increased between 1994
and 2004 for young, middle-aged, and older Americans. Given
these data, it seems natural to explore whether the aging of
the population or the greater propensity for households within
each age category to be homeowners accounts for most of the
increase in the overall homeownership rate.
 Doms
and Krainer (2006) quantify the role of changing demographics
by decomposing the increase in the homeownership rate into
three components. The first component measures the extent to
which the overall homeownership rate would change if each demographic
group did not change its propensity to be homeowners, but the
share of population in each demographic group did change. The
second component asks to what extent the overall homeownership
rate would change if the share of each demographic group stayed
the same, but their propensity to be homeowners changed. The
third component, which tends to be very small in the cases
we examined, captures the correlation between the change in
the propensity to be a homeowner and the change in the share.
(See Doms and Krainer 2006 for more details and precise definitions
used in this analysis). The authors find that the first component,
the aging of the population, accounts for a little more than
one-third of the change in the overall homeownership rate.
The second component, the change in homeownership propensity,
accounts for almost two-thirds of the change, making this factor
about twice as important as the aging of the population in
understanding the change in the overall homeownership rate.
Doms and Krainer
performed similar decompositions for other demographic characteristics,
including educational attainment, marital status, wage income,
and the number of children. They found that that the overall
increase in the homeownership rate was mainly driven by the
increased propensity to be homeowners. Although nearly every
demographic slice of the population enjoyed higher home ownership
rates in 1994 than in 2004, especially large increases occurred
for households headed by people with college degrees and households
where the head is unmarried. Thus, changing demographics help
explain some of the increase in the overall homeownership rate,
but they do not represent the most important piece of the story.
Other possible
explanations
Several factors
other than demographic changes may explain the broad-based
increases in homeownership rates. Unfortunately, however, there
is little research available to quantify their effects; therefore,
the ideas in this section are more speculative than the demographic
analysis. With that said, it seems plausible that one of the
more important factors explaining the broad-based increase
in homeownership from 1994 to 2004 could be the myriad of innovations
in the mortgage finance industry that occurred during that
time, some of which are discussed below and more thoroughly
discussed in Doms and Krainer (2006).
Several innovations
helped propel the rise of the subprime market during the 1990s
and into the 2000s. Although definitions of subprime
mortgages vary, in essence they are loans given to households
with lower credit quality, and they entail higher than average
interest rates. According to Harvard University's Joint Center
for Housing Studies (2006), between 2001 and 2005, the subprime
market grew from just $210 billion (in real terms) to $625
billion. It seems probable that the growth in the subprime
market has given many households access to credit that would
previously have been denied; hence, the increase in the subprime
market may have helped boost the homeownership rate.
Growth in the
subprime market arose, in part, because of the increased use
of credit scoring. Credit scoring is a relatively low-cost
technique of assessing the risk of a loan, so it may have made
subprime lending decisions cheaper and allowed mortgage lenders
to consider a larger volume of high-risk loans.
Another
type of innovation in the mortgage industry that may have boosted
demand for homeownership is the development of home equity
lines of credit and streamlined processes for refinancing.
Using these, homeowners can tap the equity from their homes
easily and at relatively low costs, thus making the home a
more appealing savings vehicle and, consequently, making homeownership
more desirable. Also, as discussed in Doms and Krainer (2006),
there has been an increase in the array of mortgage products
available to consumers, especially products that have low initial
payments and low down payment requirements. These products
may be especially appealing to consumers who are cash constrained
and expect their incomes to increase over time.
Of
course, there are reasons beyond innovations in the mortgage
industry for homeownership to have increased. For instance,
from 2000 to 2004, house prices increased at an attractive
8.7% per year on average; it is possible that homeownership
rose in part because some households viewed housing as a good
investment. However, there are a couple of reasons to suspect
that this "investment" story may not be as important
as other stories in understanding the increase in homeownership.
For one, the homeownership rate started increasing well before
house prices started posting increases that were above their
long-term average; for another, the increase in homeownership
rates occurred at a time when other investments, namely equities,
posted above-average gains.
This
list of possible reasons for the increase in homeownership
rates is far from exhaustive, but includes some of the most
likely suspects. Given the importance that policymakers place
on homeownership, and the importance of homes in families'
portfolios, they will be the focus of further research.
Conclusion
The homeownership
rate in the United States increased steadily and sharply from
1994 to 2004. A portion of the increase may be due to the aging
of the population, but increases in homeownership rates are
widespread across many demographic groups, so one must look
beyond demographic trends to explain the increase. As this Economic Letter suggests, some of the
explanation likely stems from innovations in the mortgage market
that resulted in greater access to credit, lower down payment
requirements, and easy and low-cost access to the equity in
a house, which makes homeownership more attractive.
Mark
Doms
Senior
Economist
Meryl
Motika
Research
Associate
References
[URLs accessed October 2006.]
Bucks, Brian K.,
Arthur B. Kennickell, and Kevin B. Moore. 2006. "
Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004
Survey of Consumer Finances."Federal Reserve
Bulletin 92, pp. A1-A38.
Doms, Mark, and
John Krainer. 2006. "Mortgage Market Innovation and Consumer
Welfare." Manuscript.
Doms, Mark, and
Meryl Motika. 2006. "Property
Debt Burdens." FRBSF
Economic Letter 2006-18 (July 28).
Joint
Center for Housing Studies of Harvard. 2006. The
State of the Nation's Housing 2006. Cambridge,
MA: Harvard University.
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of the Federal Reserve Bank of San Francisco or of the
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