Accounting for the Decline in Homeownership Among the Young

Homeownership rate for young households in the United States has declined significantly since 1976. An examination of the ownership-age profile of college and non-college households suggests that while college graduates are postponing home purchasing, a large fraction of non-college graduates have become permanent renters. This paper shows that the diverging homeownership dynamics between college and non-college graduates can be accounted for by an inelastic supply of houses combined with a change in the income distribution due to a higher population share of college graduates and a widening gap in household income between college and non-college graduates. The change in the income distribution drives up aggregate housing demand and leads to higher house prices. As a result, non-college graduates find owning less affordable while college graduates with steeper earning profile postpone home purchasing. Using data for the 105 largest metropolitan areas in the U.S. over 1980 to 2010, I find that cities with more college graduates tend to have higher local house prices, lower young homeownership rate for both college and non-college households, and lower middle-aged homeownership rates especially among the non-college households. Moreover, a rise in the household income of college graduates further increases local housing price and lowers homeownership rates for non-college graduates. The changing income distribution can account for the majority of the observed changes in young and middle-aged homeownership rates for both college and non-college graduates.