Higher Home Ownership, Lower Home Price

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

May 2007

Yes, at least that is what the USA statistics in 2000 appear to suggest and yes, it goes against the instinct of most. Many people would have thought a higher home ownership rate would mean generally a higher home price compared to places with lower home ownership rates. And why not, they might ask. Higher home ownership rates mean, given all things being equal, households are eager to become their own landlords and thus are keener to buy. This in turn pushes up demand and potentially prices. Nonetheless, this is not what the data indicates.  Your humble author has no definite answer or theory to explain this, and does not rule out the possibility of randomness i.e. it just so happens that in 2000 the statistics show thus. A learnt and experienced economist would be a better choice. In any event, here are the overall results and observations (based on data contained in www.dataplace.org): 

A)     We have looked at 51 states in the USA and compared the typical home prices of these states to their various economic-social attributes including average income, poverty rate, population density (so many people per square mile), vacancy, and yes, home ownership rate.


B)     Home price and average income = the factor with the highest correlation among the ones mentioned is average income. The R is 0.79 and the R2 is 0.62, and this is statistically significant. Curiously, we have done similar studies on other places outside of the USA and on different periods of the USA, and the observations are quite similar. Most of the time, income factors such as GDP per capita, household income, income per capita, and the like, are quite correlated with home prices, whereas factors such as mortgage rates and so on come and go, i.e. they may appear to correlate during certain (usually shorter) timeframes but in the long run do not seem to matter much.


C)     Home price and home ownership rate = the issue here is not that these are uncorrelated. They are although not to the extent which price and income show. BUT the surprising angle (to many) is that these two are negatively correlated! NOT ONLY is the instinctive ˇ§higher ownership rates mean higher home pricesˇ¨ not being overly true, it appears to be somewhat false! Home prices are higher in places where home ownership rates are lower. The R is (0.67) and the R2 is 0.45.


D)     Home price and population density = a higher population density means, given all factors being the same, the pressure on land (use) is higher, and thus, the price for land and real estate could be higher than a place with similar-sized but less crowded population. This means while population density may be a necessary condition, it is NOT a sufficient condition by itself in terms of causing or leading to higher home prices. In fact, the R is relatively weak at 0.37 and the R2 is 0.14.


E)     Home price and vacancy rate = usually these two go the opposite way to one another and they do here, though not really in a big significant way. The R is (0.28) and the R2 is 0.08. This appears to imply while a high vacancy does exert some pressure on home (and real estate) prices, its impact is NOT significant or proportional e.g. using $1M as basis, 10% vacancy, $900K; 20% vacancy, $800K, and so on.  


F)     Home price and poverty rate = these two are similar to (E) but are even less significant. While places with high poverty rates tend to have lower home prices, the link is very weak. That is, some places with high poverty rates will also see high home prices. Poverty as a factor or aspect does not appear to have much influence on home prices. The R is (0.23) and the R2 is 0.06.


The above offers food for thought = sometimes popular instincts and notions could be wrong and misleading. Authorities preferring high home ownership rates and (thus) steady home prices may wish to reconsider the thesis.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.                                

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