The U.S. homeownership rate rose in 2017 for the first time in 13 years, driven by young buyers who overcame rising prices, tight supply and strict lending conditions to purchase their first homes.
The annual increase marks a crucial turning point because it comes after the federal government reined in bubble-era policies that encouraged banks to ease lending standards to boost homeownership.
This time, what’s driving the market is a shift in favor of owning rather than renting coming from the largest homebuying generation since the baby boomers: millennials.
“This is market, market and market … There’s no government incentive program in sight that is having this effect,” said Susan Wachter, a professor of real estate and finance at the Wharton School at the University of Pennsylvania. “This is back to basics.”
The homeownership rate rose to 64.2% in the fourth quarter of 2017 from 63.7% a year earlier, according to data released Tuesday by the U.S. Census Bureau. The share of Americans who own a home has been on the rise since the first quarter of last year, indicating a reliable upward trend.
The homeownership rate among households headed by someone under age 35 rose to 36% in the fourth quarter from 34.7% a year earlier. That was by far the largest increase of any age group during the period.
“This is happening because young households are buying homes. Full stop,” said Ralph McLaughlin, chief economist at home listings provider Trulia.
Millennials are entering the market after years of stagnant wages and widespread wariness about the pitfalls of homeownership. After the housing crash that nearly brought down the global financial system in 2008, young people were hampered by tight credit and lackluster wage growth, along with anxiety over the possibility of getting trapped in homes worth less than they paid, as waves of previous home buyers had.
Many millennials also have delayed getting married and having children, which are triggers to buying a first home.
Kevin Bryant, a 32-year-old who works in sales at a software company, and his wife, Carmen, in December moved into their first home, in suburban Chicago.
The couple had been paying $1,100 for their apartment in a bustling neighborhood in northwestern Chicago and were in no hurry to buy. Eventually, however, their one-bedroom apartment began feeling cramped with two dogs and noise from upstairs neighbors.
“Once we got married, it became real,” he said. “We wanted a yard.”
It took the newlyweds five months to find a home. They had to compete with three higher offers on the four-bedroom house and won by making a personal appeal to the seller, sending a heartfelt letter.
The monthly payment for their mortgage and taxes will be higher than their apartment rent but Mr. Bryant said they still chose conservatively.
“We could afford a lot more [but] we just wanted a home where if one of us got laid off, one of us could support us,” he said.
The U.S. homeownership rate shot up to more than 69% in the mid-2000s, buoyed by mortgages with little or no down payments, many of them purchased or backed by government-sponsored entities such as mortgage giants Fannie Mae and Freddie Mac . During the crash, those entities were left on the hook for billions of dollars’ worth of bad mortgages and required massive taxpayer bailouts.
Large banks, meanwhile, were forced into tough legal settlements stemming from poor underwriting decisions they made on mortgages that soured during the bust. In response, they put in place tougher credit and down-payment requirements that excluded many buyers, including young people with thin credit histories or large student-debt burdens.
The homeownership rate bottomed out at a 50-year low of 62.9% in the second quarter of 2016.
That produced a drag on the economy. Not only does demand for homes help drive construction, but new homeowners also spend money on furniture, landscaping and other goods and services, boosting economic activity.
Now, the homeownership rate is rising again as millennials begin to embrace homeownership. In all, the U.S. added roughly 1.5 million new owner households in the past year. Meanwhile, the number of renter households declined by 76,000, the second consecutive quarter in which the renter population shrunk on an annual basis.
The homeownership rate remains below the long-term average of around 65%. Economists said there are likely still years of recovery ahead, in part because home prices are growing faster than wages and inflation. The S&P CoreLogic Case-Shiller National Home Price Index, which measures prices for single-family homes in major metropolitan areas around the country, rose 6.2% in the 12 months ended in November—about three times the rate of inflation.
National home prices reached a record in September 2016, a decade after the peak of the housing bubble. Adjusted for inflation, prices remain below their 2006 peak.
The hurdles of supply shortages and rising home prices are likely to remain in place in 2018, economists said. In addition, buyers are expected to face rising mortgage rates and changes to the tax code that will offer fewer incentives for homeownership.
But the tax changes could boost the overall economy and put more money in renters’ pockets, helping them to save for a down payment.
“We’ve got lots of jobs and easier credit, and that should win the day,” said Mark Zandi, chief economist at Moody’s Analytics.