Some Perspectives on Housing

22.08.17
Written by Richard Hokenson 

Highlights of the housing report are:
 
  • The post crisis recovery in U.S. sales of both new and existing homes continues at a very modest pace. The share of total home sales comprised of new homes, however, is still well below the average that prevailed prior to the global financial crisis. This suggests that housing continues to suffer from a lack of supply, a development confirmed by the fact that net household formations (demand) has been much stronger relative to housing completions (supply) for much of the recovery.
  • The number of owner-occupied housing units, which grew rapidly through 2005, has shown little change since then. As a proportion of total households, owner households are at a new low post-1975 while renter households have established a new peak. The most recent release on Housing Vacancies and Homeownership for the second quarter, however, suggests that composition will now shift as the rate of homeownership has recently turned up.
  • Americans are becoming less housebound. The recovery in the turnover rate of the stock of owner homes has meant that the average length of owner tenure has receded from the levels prevailing during the global financial crisis. It is now somewhat below 15 years. We (Hokenson & Company) expect that the release of the number of households for 2017 will confirm that the recovery in tenure is continuing.

The recovery in sales of new and existing homes post crisis continues at a very modest pace (see Chart 1). Although it is the case that both sales of existing homes (see Chart 2) and sales of new homes (see Chart 3) have increased relative to their recession-induced troughs, the more rapid pace of recovery in existing homes has meant that the share of total home sales comprised of new homes is still well below the average that prevailed prior to the global financial crisis (see Chart 4).

 
 
 
This suggests that housing continues to suffer from lack of supply, a development confirmed by the fact that net household formations (demand) has been much stronger relative to housing completions (supply) for much of the recovery as shown in Chart 5.

Housing Tenure

A household is defined as an occupied housing unit. A housing unit is a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied as separate living quarters. Separate living quarters are those in which the occupants live and eat separately from any other persons in the building and which have direct access from the outside of the building or through a common hall. The occupants may be a single family, one person living alone, two or more families living together or any other group of related or unrelated persons who share living arrangements. People not living in households are classified as living in group quarters.

The focus in this report is on tenure, i.e. is the housing unit owner-occupied or is it a rental unit. As displayed in Chart 6, the number of owner households, which grew rapidly from 1975 to 2005, has shown little change since then. The number of renter households, on the other hand has increased more rapidly since 2005.

 

As a proportion of total households, owner households are at a new low post-1975 (see Chart 7) while renter households have established a new peak (see Chart 8). The most recent release on Housing Vacancies and Homeownership, however, suggests that composition will now shift as the rate of homeownership has recently turned up (see Chart 9).

 
 

Are Americans Housebound?
One often hears that Americans are becoming more and more housebound, i.e. they are stuck in the house that they live in because they are unable to sell it. In order to estimate average length of tenure, we begin with calculating the turnover rate by relating total home sales to the existing number of owner households (see Chart 10). For example, a turnover rate of 100 sales per 1000 owner households means that 10% of the number of owner homes changed hands in a given year.

Inverting the turnover rate allows us to calculate average tenure in years (see Chart 11). It fell sharply following the 1981/82 recession, drifted modestly higher for several years, and then staged a prolonged decline that troughed in 2005. It rose rapidly following the global financial crisis, stabilized, and is now consistently registering a recovery. We expect that the release of the number of households for 2017 will confirm that the recovery is continuing. This estimate is consistent with a recent report from the Federal Reserve Board which shows average tenure of 15 years in 2014.

This measure of tenure, however, is at variance with a chart recently published by RealtyTrac. Although their chart reproduced below as Chart 12 is labelled “Average U.S. Homeownership Tenure (Years)”, it is not displaying average tenure for all homeowners. It is a measure of the length of time for those who sold whereas our computation is an estimate of how long it would take to sell at the current turnover rate. We are still puzzled that their calculation shows average tenure of about 4 years even as the U.S. economy was in the throes of the credit crisis. Be that as it may, we do agree with their conclusion that housing remains supply-constrained when they say that their estimate of the current high tenure rate “…is in part the result of low inventory of move-up homes available for current homeowners, while also perpetuating the scarcity of starter homes available for first-time homebuyers.”

 
 

 

This update was researched and written by Richard Hokenson. Data is as of 22 August 2017

 

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