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After falling to the lowest level in 50 years, the U.S. homeownership rate bounced up slightly in the third quarter of this year.
At 63.5 percent, it is still lower than the same time a year ago and significantly down from its high of 69.2 percent at the height of the last housing boom, according to the U.S. Census. While the merits of homeownership are certainly debatable, household formation is a clear driver of economic growth, and the gains there are accelerating as well.
Household formation, which is the number of newly occupied housing units (both rented and owned) climbed by just more than 1.1 million. While most of the household formation during the housing recovery has been on the renter side, just under half of those formed in the last quarter were owners.
"Though the majority of household formation is still renters, the owner-occupied share was at its highest level in a decade. Both the improving economy and the aging of millennials will give homeownership a boost," said Jed Kolko, chief economist at Indeed, an online job site.
Rental demand continues to be stronger than homebuying demand for several reasons. Younger buyers who would typically be most active have been sidelined from the housing recovery due to high levels of student loan debt, higher home prices, weak income growth and tighter credit conditions. There has also been something of a social shift toward the flexibility of renting. And then there are millions of Americans who are still repairing their credit after losing their homes to foreclosure during the housing crisis.
"If the household formation rate continues to grow, that means people, especially young adults are increasingly confident, about the labor market and about the economy," said Aaron Terrazas, an economist at Zillow.
Millennials have been taking longer to get married and have children, the two key drivers of homeownership. As millennials now age well into their 30s, dynamics are suddenly shifting.
"I think this is good news in light of the fact that millennials now make up the largest pool of potential new households. Though many are still living with their parents, they eventually will move out," noted Ralph McLaughlin, chief economist at Trulia.
"First, they will rent, and as they settle down, then they will buy. While we can't know for sure if they will own at rates of older generations, our survey work at Trulia shows 80 percent of millennials want to own a home — the highest share of any cohort and the highest in the seven years we've run the survey."
Flying in the face of homeownership continues to be the severe lack of homes for sale, and the situation is only getting worse. The number of for-sale listings usually drops in the slower fall and winter months, but in October it showed a sharper decline than usual, according to Realtor.com. Supply is especially low for cheaper, entry-level homes, but total supply is lower than it was one year ago.
"The number of homes for sale declined more in October than at any other point this summer, leaving us with 11 percent fewer active listings than a year earlier and the largest monthly inventory drop since July 2015," said Jonathan Smoke, chief economist at Realtor.com.