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Tight Lending, Foreclosures to Prompt Homeownership Declines

With the homeownership rate already at its lowest point since 1995, ""Capital Economics"":https://www.capitaleconomics.com/ predicts further decline before a rebound occurs.


The analytics firm predicted last July that the homeownership rate would fall to a low of 64 percent, and the firm is sticking to that forecast.

The firm suggests the 64 percent low will come sometime ""within a year or so,"" and when it does, the market will have about 9 million more renters and only 400,000 more homeowners than it did in 2004 when the homeownership rate peaked.

In the first quarter of this year, the rate ""dropped"":http://dsnews.comarticles/homeownership-rate-at-8-year-low-2013-04-30 0.4 percentage points to 65 percent. While the peak of 69.2 percent in 2004 ""never looked sustainable,"" according to Capital Economics, the current rate ""is now as far below its trend level as it was above it in the boom.""


One of the major contributors to the ongoing decline in homeownership is the high level of foreclosures that continues to challenge the market. As of the end of 2012, the market held 1.9 million homes in foreclosure.

While some of these loans might be cured, Capital Economics predicts at best, the result will be a 0.8 percentage point decline in the homeownership rate.

In the first quarter of this year, the greatest decline in homeownership took place among those ages 35 to 44, which Capital Economics interprets as evidence that foreclosures are a major source of changes in the owner and renter markets.

Another factor contributing to the declining homeownership rate is tight lending standards. According to data from Ellie Mae, many lenders are demanding FICO scores of about 745, while the average score is lower than 700.

Relying on an average annual household formation of 1.2 million, Capital Economics calculates about two-third of new households will rent, resulting in an additional 0.3 percentage point drop in the homeownership rate over the next year.

With a 0.3 percentage point drop resulting from tight lending standards and a 0.8 percentage point drop resulting from foreclosures, the homeownership rate is set to reach the 64 percent mark Capital Economics predicted last summer.


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