Homeownership in the United States: where we've been; where we're going

Business Economics, July, 1997 by David W. Berson, Eileen Neely

Homeownership has long been synonymous with the "American Dream," and it remains one of the cornerstones of federal housing policy. Indeed, many of the benefits accorded to owner-occupied housing in the federal tax code are there in an attempt to help boost homeownership. These benefits include the deductibility of mortgage interest payments, significant exclusions (or at least deferrals) of capital gains, and complete exclusion from taxes of the flow of imputed services from housing. The rationale for these deductions and exclusions (as well as other nontax benefits for housing) is that homeownership provides significant benefits - to both the homeowner (as well as his or her family) and society as a whole. For example, the Congressional Budget Office (1997) recently stated that "preferential treatment for homeownership encourages people to become homeowners and to purchase larger homes. Increasing homeownership may contribute to social and political stability by strengthening people's stake in their communities and government. In addition, such preferential treatment may stabilize neighborhoods by encouraging longer-term residence and home improvement."(1)

These positive internal and external benefits from homeownership have a long history of support in policy circles. The Clinton Administration, for example, set as a goal in 1995 that the country should have a 67.5 percent homeownership rate (the share of households that own their own home) by 2000. Moreover, Herbert Hoover called the owner-occupied home "a more wholesome, healthful, and happy atmosphere in which to raise children." And Lyndon Johnson promoted homeownership in the 1960s as part of his strategy to combat urban problems. Given the public policy presumption in favor of homeownership, how high could the homeownership rate realistically rise, and what are the most likely levels that it could reach by 2005?

HOMEOWNERSHIP RATES: AN HISTORICAL PERSPECTIVE

The national homeownership rate remained remarkably stable for the fifty years ending with World War II. As Table 1 shows, the homeownership rate moved within a narrow band of roughly 43 to 48 percent during this period. The recovery from the Great Depression, incentives to purchase homes (especially through mechanisms such as government-insured mortgage loans from the Veteran's Administration), significant pent-up demand after World War II, and large amounts of new construction of modestly priced houses in Levittown and similar suburban developments all led to a sharp rise in the homeownership rate - pushing it up to a record level of almost 64 percent by the late 1960s.

The homeownership rate continued to rise in the 1970s, driven by a combination of extraordinarily positive demographics and extremely low (and sometimes negative) real interest rates. Analysts typically view the 25 to 34 age group as the "first-time homebuying cohort," as many households purchase their first home within those ages (but, as we will see later in this paper, many households do not make their first home purchase until later in life). The baby boom age cohort (those individuals born between 1946-64) is the largest cohort of residents in U.S. history. If we take the 25 to 34 age group as the primary first-time buyers, then the older half of the baby boomers all were within this prime first-time buying group at some point during the 1970s. Moreover, real long-term ex-post mortgage rates averaged only 150 basis points over the entire decade of the 1970s, and were negative for three years in that period. The combination of a surge of potential first-time buyers and low real interest rates led to yet another jump in the homeownership rate with the record rate of 65.8 percent set in the middle of 1980.

Table 1

The Homeownership Rate, 1890-1965

Year                               Rate

1890                               47.8%
1900                               46.7
1910                               45.9
1920                               45.6
1930                               47.8
1940                               43.6
1945                               53.2
1950                               55.0
1956                               60.4
1960                               61.9
1965                               63.3

Source: U.S. Bureau of the Census (1989)

U.S. Bureau of the Census, Historical Statistics: Colonial Times to 1970, 1989.

David W. Berson, "The Importance of Demographics in Economic Analysis: The Unusual Suspects," Business Economics, January 1997.

McArdle, Nancy and Kelly S. Mikelson, "The New Immigrants: Demographic and Housing Characteristics," Joint Center for Housing Studies of Harvard University, Working Paper W94-1, April 1994.

Alicia H. Munnell, Geoffrey M.B. Tootell, Lynn E. Browne, and James McEneaney, "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review, vol. 86, no. 1, March 1996, pp. 25-53.

Peter J. Fronczek and Howard A. Savage, Who Can Afford to Buy a House?, Current Housing Reports H121/91-1, U.S. Department of Commerce, Bureau of the Census, May 1991.