January 29, 2015 / 3:01 PM / in 2 years

U.S. homeownership hits 20-year low, but new households growing

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An advertisement for a reduced price is seen outside of a home for sale in Dallas, Texas September 24, 2009.Jessica Rinaldi

WASHINGTON (Reuters) - U.S. homeownership fell to a 20-year low in the fourth quarter, but a sharp rebound in the rate at which Americans are setting up home is expected to help drive a pick-up in housing.

The seasonally adjusted home ownership rate slipped to 63.9 percent, the lowest level since the third quarter of 1994, the Commerce Department said on Thursday. The rate, which peaked at 69.4 percent in 2004, was 64.3 percent in the third quarter.

Household formation, however, more than quadrupled to 1.7 million in the fourth quarter from only 356,000 in the same period in 2013. While the gains were driven by renter households, that should provide a boost to home building.

Housing has lagged an acceleration in the broader economy. But with household formation picking up, thanks to a strengthening labor market, and the government taking steps to ease credit requirements for first-time buyers, housing is expected to regain momentum this year.

"The combination of a high share of young adults living in the parental home, falling mortgage rates and loosening credit means that the outlook for household formation is strengthening," said Paul Diggle, a property economist at Capital Economics in London.

"That's one of the reasons why we are optimistic about the prospects for homebuilding over the next few years."

The residential rental vacancy rate dropped four-tenths of a percentage point to 7.0 percent in the fourth quarter, the lowest level since 1993. That will likely make renting expensive and increase the appeal of owning a house, economists said.

"Household formation is picking up fast enough to outpace construction and is likely to be channeled in a constructive manner, since rents and home prices continue to rise at a healthy pace," said Stephanie Karol, an economist at IHS Global Insight in Lexington, Massachusetts.

Homeownership dropped across all four regions in the fourth quarter, with declines pronounced in almost all age groups, with the exception of 45-54-year-olds, a group that saw a very mild gain.

Many economists believe the homeownership rate will probably start stabilizing in the coming quarters.

"The decade-long decline in the share of the population who own their home may now be drawing to an end," said Diggle.

"Wage growth may soon accelerate, helping young households to make the leap into homeownership. The survey evidence certainly suggests that owning a home remains part of most people's perception of the American dream."

Reporting by Lucia Mutikani; Editing by Leslie Adler

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