For most people in the U.S., the biggest purchase they ever make is their home. Most people buy several of them over a lifetime and they are usually quite happy with their homes, both as a place to live in and, when they sell it, as an investment.

All measures of the single-family housing market set new records in 2003. We saw the largest number of home resales ever (about 6.07 million according to the January 6 NAR press releases).

The December 24, 2003 “New Residential Sales in ­November 2003” release from the U.S. Census Bureau reported­ 1,008,000 new single-family home sales for the first eleven­ months. Last year was the first year over one million for new home sales.

The U.S. Census Bureau report on “New Residential Construction in December 2003,” which was released on January 21, showed total housing starts of 1,848,400 units in 2003. Total starts of single-family homes were 1,440,400, up 8.1 percent from the old record set in 2002.

Not coincidentally, as shown in Chart 1, the homeownership rate in the United States hit a new record in 2003, with the rate reported by the U.S. Census Bureau on October 28 at an all-time high of 68.4 percent. As Chart 1 shows, the homeownership rate in Michigan has been well above the national average since the state data became regularly available in 1984.

In fact, Michigan ranked fourth in the country in 2002. Minnesota and South Carolina tied for first at 77.3 percent. Michigan was at 76.0 percent in 2002, a decline from the 77.2 percent (first in the country) in 2000 and the 77.1 percent (also first) in 2002.
There are a number of reasons for the increase in the homeownership rate across the U.S. One key reason is ­demographics.

Most people don’t realize that the homeownership rate is highest among households where the head is 65–74 years old (82.6 percent) and below 50 percent if the head is 29 years old or younger. The baby boom generation comprises all people born from 1946 to 1964 and is about one-third of the total U.S. population. As they get closer and closer to 65, a greater proportion of them will buy a home. This will continue to drive up the homeownership rate.

Another major factor is the huge increase in immigration (both legal and illegal) over the past decade. The 2000 Census found that the proportion of people living in the U.S., who were born in another country was the highest since 1930. Immigrants were 11.1 percent of the total population in 2000, up sharply from 7.9 percent in 1990.

The record share of immigrants in the total population was in 1920, when it was 13.2 percent.

In 1930, it was 11.6 percent, close to the 2000 level.

For reasons that no one has yet explained satisfactorily, immigrants tend to buy homes 10 years later than people born in the U.S. Thus, the immigration boom of the last decade should help increase the homeownership rate for years to come.

Chart 2 shows a huge reason why the homeownership rate has increased so much in recent years. Housing affordability simply measures how hard or easy it is for a median­ income family to qualify for an 80 percent mortgage on a median purchase.

This index peaked in the early 1970s when incomes were rising and inflation rates were relatively low. The “stagflation” of the next decade (remember a 21 percent prime rate, a 15 percent increase in the consumer price index, and a national unemployment rate of 10.8 percent in both November and December of 1982) crushed housing. The last decade, while not quite reaching the 1971–1973 peaks of housing affordability has been the longest sustained period­ of high affordability levels ever.

The stock market decline from the March 2000 peak made many people aware of the logic of considering a home as an investment. The Board of Governors of the Federal Reserve System releases data on the “Flow of Funds” in the U.S. economy every quarter (www.federalreserve.gov).

These data show balance sheets and income statements for all major players in the U.S. financial system. Chart 3 shows the value of homeowners’ equity. The data released on January 15 show that in the third quarter of 2003, households had residential real estate holdings worth $14,551.9 billion at market value. Against this huge asset, they owed $6,650.9 billion.

Thus, homeowners’ equity in the third quarter of 2003 was a record $7.9 trillion. Chart 4 shows that homeowners’ equity was 54.3 percent in the third quarter of 2003.

In a classic example of “the glass is half empty” thinking, The Wall Street Journal published an article back in June pointing out that homeowners’ equity as a percent of home value had sunk to the lowest level ever in the first quarter of 2003. It’s now even lower.

However, the fact that homeowners had $7.9 trillion in unborrowed home equity on September 30, 2003, is far more significant. This huge number not only means that the potential for a new refinancing boom is there, but also means that there is very little likelihood that the U.S. is experiencing a housing “bubble.”

The gloom-and-doom crowd would like to have you worry­ that house prices could go down just like stock prices did in 2000, 2001, and 2002. You shouldn’t waste a minute of sleeping time worrying about that. Strong positive demographic trends, both in aging baby boomers and continuing waves of immigration, are two huge reasons for optimism that housing demand will stay high. You should also have confidence that financial market conditions will remain favorable for some time to come.

This means long-term interest rates, in particular the ten-year U.S. Treasury note, should average about 4.5 percent a year if inflation is about 1.5 percent.

This bodes well for mortgage rates for at least the next five years.

The residential housing market may not set new records in 2004, but it will easily be the second-best year ever seen. Furthermore, 2005–2008 should be great years for real estate, too.

So, don’t worry about forecasts of big declines in housing activity. Just go out there and keep providing excellent service to all those eager homebuyers.