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WEAK HOUSEHOLD FORMATION HAMPERS HOUSING By Mark Lieberman, Chief Economist for the Five Star Institute The number of households owning homes rose a scant 32,000 in the second quarter, but the homeownership rate remained at 65 percent, the lowest level in 18 years, the Census Bureau reported. At the same time, the Census Bureau data showed the number of new household formations dropped dramatically in the first half of the year, an average of about 500,000 new households per month compared with 1.4 million new households per month in 2012. The homeownership rate peaked at 69.2 percent in the second quarter of 2004. The rate measures the proportion of households owning their primary residence and is computed by dividing the number of household occupied by owners by the total number of occupied homes. The Census Bureau also reported the homeowner vacancy rate fell to 1.9 percent in the second quarter from 2.1 percent in the first quarter. The homeowner vacancy rate is the proportion of the homeowner inventory that is vacant and for sale. The Census data paints a grim picture for the home sales market, which has already been struggling against mortgage restrictions and weak inventory. The Census report suggests homeownership may have lost its place in the "American dream" as a new generation of potential homebuyers may have become wary of homeownership as a result of the wave of foreclosures in the last several years. If the monthly average of new households continues for the rest of the year, it would mark the weakest year for household formation since 2010, when the monthly average was 443,500 new households. The number of housing units for sale in the second quarter, Census reported, was 1,460,000—the lowest level since the second quarter of 2005—down from 1,609,000 in the first quarter and from 1,591,000 one year earlier. The report confirmed assertions by the National 40 Association of Realtors of weak inventories. The number of housing units held off the market in the second quarter though was 7,476,000, down from 7,609,000 in the first quarter and from 7,595,000 a year ago. According to the Census report, there were 74,543,000 owner-occupied homes in the second quarter, up from 74,511,000 in the first quarter but down from 74,660,000 a year ago. The weak homeownership rate combined with the drops in homes for sale and household formations suggests continued challenges ahead for home sales. At the same time, the profile of homeowners, by age, is changing. The homeownership rate for older Americans—65 and over—rose in the second quarter to 80.9 percent, the highest level since the third quarter 2012 when it was 81.4 percent. The rate was 80.4 percent in the first quarter. The higher ownership percentage for that age cohort—typically home sellers—reflects price resistance among homebuyers, historically the 25to 34-year-old age cohort. The homeownership rate for those 35 or younger slipped 36.7 percent in the second quarter from 36.8 percent in the first. The homeownership rate for those under 35 was as high as 43 percent in Q 3 2006. According to the quarterly report, the number of housing units in the second quarter was 132,754,000, down from 133,082,000 in the first quarter but up from 132,405,000 one year earlier. According to the Census Bureau, 18,077,000 units were vacant in the second quarter, down from 18,439,000 in the first quarter and from 18,473,000 a year earlier. Regionally, the homeownership rate rose only in the Northeast, up to 63.2 percent from 62.5 percent in the first quarter. The homeownership rate fell to 69.4 percent in the Midwest from 70 percent. The rate was flat in the South at 66.5 percent and in the West at 59.4 percent. DELINQUENCIES, FORECLOSURES RECEDE TO MORE 'NORMAL' LEVELS The percentage of homeowners behind on their mortgage fell to the lowest level since 2008, with a decrease in 90-plus delinquencies driving the improvement, according to a report from the Mortgage Bankers Association (MBA). On a seasonally adjusted basis, the national mortgage delinquency rate on one-to-four-unit residences stood at 6.96 percent in the second quarter, a decrease from 7.25 percent in the first quarter and 7.58 percent a year ago. Delinquent loans that were 90 days or more past due saw the biggest improvement, falling to 2.65 percent compared to 2.88 percent in the previous quarter and 3.19 percent last year. "For most of the country, delinquencies and foreclosures have returned to more normal historical levels," said Jay Brinkmann, MBA's chief economist and SVP of research and economics. Foreclosures starts were down to 0.64 percent in the second quarter compared to 0.7 percent in the prior quarter and 0.96 percent last year. The second-quarter figure represents the lowest level since the first quarter of 2007. Meanwhile, the share of loans in foreclosure inventory decreased to 3.33 percent, down from 3.55 percent in the first quarter and down significantly from 4.27 percent a year ago. The serious delinquency rate, which includes 90-plus delinquencies and foreclosures, plunged 145 basis points from last year to 5.88 percent in the second quarter. While delinquency rates were down across the different loan categories, FHA loans were the exception. According to the MBA, FHA's 30-day delinquency rate rose to 5.24 percent from 4.98 percent in the previous quarter. When observing performance by state, the MBA found judicial states held a foreclosure inventory rate of 5.59 percent, triple the rate of 1.86 for non-judicial states. However, foreclosure inventory in judicial states is still at the lowest since 2009, while non-judicial states hit the lowest point since 2007. Florida maintained the title of having the highest percentage of loans in foreclosure, though the state has made significant progress. "[W]hile 10 percent of the mortgages in Florida are somewhere in the process of foreclosure, this is down considerably from the high of 14.5 percent two years ago. While Florida leads the country in the rate of foreclosures started, that rate of 1.1 percent is the lowest since mid-2007 and half of what it was three years ago," Brinkman added. The share of loans in foreclosure was also high in New York and New Jersey, where the rates were 8 percent and 6 percent, respectively.

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