Media outlets the industry over are reporting on the Commerce Department latest homeownership report, but is the data reliable?
The coverage was quite widespread – earlier this week, the Commerce Department reported that the homeownership rate in the U.S. hit a 19-year low, falling to 64.8 percent; that’s down from 65.1 percent a year ago, and from the peak of 69.4 percent in 2004.
“We are becoming more of a rental society. It’s becoming harder to own a home,” said Patrick Newport, an economist at IHS Global Insight in a Reuters report. “People who lost their homes to foreclosure are now renting and credit standards have tightened significantly.”
It all makes for sensational headlines and doomsday predictions, but there’s one problem at the center of it all – the homeownership rate is not to be trusted. Why? Here are the reasons:
1. Incomplete Data – The homeownership rate depends on the share of households that are owners; in other words, it takes a binary view of the world, where households are either owners or renters. The problem is, the rate does not factor in people who live under someone else’s roof. So all those Millennials living with their parents? older parents living with grown children? housemates? Those people do not own or rent, so they’re not counted in the homeownership rate, which can produce some misleading results.
2. The Discouraged Worker Anomaly – That is the same kind of problem that plagues the nation’s unemployment rate, which only counts people who are actively looking for work as “unemployed.” So all those people who gave up looking for work, aka discouraged workers? None of them factors into the unemployment rate, so unemployment is routinely understated.
3. A Case Study – Here’s a good case study, courtesy of a recent blog by Trulia’s Jed Kolko for The New York Times, that shows the issues that can arise with the Commerce Department’s homeownership rate. Say that there are 10 people who live alone. Five are owners, five are renters, meaning the homeownership rate is 50 percent. However, one owner loses their home, and three renters lose their apartments, causing them to move in with the remaining homeowners. So, we have four owners and two renters left, which technically means the homeownership rate is now 67 percent – yet, four people are now living with the owners!
4. A Different Measurement – Economists have turned to labor force participation as a better way of measuring unemployment, and in his blog post, Kolko recommends a similar approach for homeownership. The “headship rate” looks at the percent of adults who head a household, meaning that it factors in both owners and renters. Using that measurement, the headship rate peaked at the height of the housing bubble at 52.3 percent in 2003, but fell to 51.2 percent in 2010, which translates to 2.5 million fewer households.
5. The Future of Housing – Going forward, the headship rate will be a key measurement of the housing recovery; after all, if new households are not being formed (either owned or rented), that means consumers are not on their own looking for residences, so it’s unlikely that housing demand will increase.