There is significant pent up demand. Household formation is below its historical average, suggesting that a return to normal would create significant demand for housing. Of course many households could choose to rent rather than buy. But the analysts believe that the decline in homeownership rates is more likely cyclical. The homeownership rate among 25-to-44-year-olds is slightly below the average that prevailed between 1985 to 1994, which the analysts believe should be the benchmark for "normal" homeownership rates. Homeownership in this period hovered between 63% and 65% before it began its rise in the 90s and peaked at 69% in 2005. If the decline is structural, then homebuyers must either have a shift in their attitudes toward homeownership or they do not have sufficient savings for a home or might fail to qualify for a home loan. But a Gallup survey shows that a vast majority of non-homeowners aged 18 to 49 plan to buy a home in the next 10 years. Also, looking at the distribution of wealth among 25-to-44-year-old renters with a household income of more than $50,000, Goldman found that nearly 40% had enough savings for a 10% downpayment and closing costs on a $200,000 house. Also nearly half of these renters have a debt to income ratio of less than 5%, which means they have the capacity to take on debt. New mortgage regulations stipulate a debt to income ratio of not more than 43%.
Separately, the analysts note that while student debt is a problem, there has been a shift of the student loan burden to higher income households. In 2007, the percent of young households owing at least $20,000 in student loans was concentrated in the $60,000-to-$100,000 income range. In 2010, it was concentrated in households with income over $100,000. "Student loan debt is higher among those who can afford it." Also homeownership rates in this age group is higher in regions where the deterioration in the labor market is less severe, suggesting that economic conditions play a role. "Given that these households appear to be financially capable of buying a home, the reason they are still renting presumably is that they are not sure whether house prices have bottomed and that they are still uncertain about their job security. As the housing and labor markets gradually recover, we expect to see the homeownership rate in this population normalize," the analysts conclude. Median household incomes are distorted. Housing bears also point to the fact that growing income inequality and flat median household incomes will depress housing demand. The analysts agree that this is a valid concern to some but argue that caution must be used in using median incomes. Shifts in the composition of households might explain why median income stays flat. For example, an aging population might mean a greater fraction of retiree population, which could explain why median incomes do not change much. Similarly, a decline in the marriage rate might explain a drop in household income. In fact, the median income of married households and median income of single households have been growing, but the mixed median household income shows a muted increase. Lending standards are likely to ease. Banks should start to ease lending standards as refinance volumes shrink and they begin to compete for purchase originations. Plus, the financial health of the average household is improving. Compared to 2005, more consumers now have a credit score over 800. Rising credit scores among consumers mean more people may qualify for a loan even if underwriting remains unchanged, the analysts said.-- Written by Shanthi Bharatwaj in New York.