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Where will young people live when they're old and gray?

Home ownership is a venerated ideal of middle class life in America, and most Americans aspire to own a home. But homeownership rates have been declining steadily since the peak of the housing boom in 2004.

The Census Bureau reports that the homeownership rate in Q4 2013 stood at 65.2 percent -- the lowest level since 1995. Homeownership hit a peak of 69.2 percent in mid-2004, as subprime mortgages and other exotic investment products were pushed out into the real estate market, and home prices were skyrocketing in many hot markets like Florida, Nevada and the Southwest.

Economists have predicted—and even welcomed—some decline in homeownership. The level achieved in the mid-2000s wasn't considered sustainable, and was driven by risky mortgages given to people who couldn’t pass even minimal underwriting standards, let alone the strict underwriting standards prevalent today.

But economists also worry that if the decline in the homeownership rate accelerates, it could be a warning sign for the economy and for the well-being of middle class families.

In many cities these days, there’s a lot of construction going on. And a lot of that is multi-family rental buildings, as opposed to single-family homes destined for sale to individuals and families.

Economist Patrick Newport at IHS Global Insight predicts the decline in homeownership will continue, and the rate will fall by at least another 1 percent or more in coming years. He says the trend is not surprising.

"It’s much more difficult to qualify for credit," says Newport. "And you have a number of people who have lost their homes to foreclosure. Those people are now becoming renters."

Who’s being shut out of homeownership? First, says Newport, anyone with low—or unreliable—income. That’s the type of borrower who could get a sub-prime mortgage back in the bubble years, and was then foreclosed in the recession or afterward.

Young people are also not entering homeownership at the same pace as before. Many 20- and 30-somethings have delayed forming households, buying a first home, marrying, or forming domestic partnerships—because jobs are scarce and incomes are stagnant.

The problem, says real estate expert Nicolas Retsinas at Harvard Business School, is that many working-class families—with steady but moderate income—are out of luck, too.

"They’re the ones who are not able to have anything left from their paychecks so they can accumulate savings to make a down payment," says Retsinas. "They’re the ones who have a difficult time paying back a mortgage, even with these very low interest rates."

Retsinas says, for many families, owning a home turned out to be a risky, unprofitable proposition in the late-2000s. "But for 50 years prior to that, it was a primary source of wealth creation," he says. "And I think that as families look at the option now, they’re nervous that if they’re not able to buy this home, get through the underwriting criteria, they will miss out on what might be rising prices, and thus rising equity."

Retsinas says that if home values rise steadily again, but middle-class families can’t buy into that, they’ll lose a key tool for building wealth and security in the future.

Chris Mayer studies housing at Columbia Business School. He sees an aging homeowner population. It’s a population that’s been able to build wealth over decades through home-price appreciation (the Great Recession notwithstanding), tax-savings (from the mortgage-interest deduction), and investment of sweat equity in their properties.

"If you look at people who are 65 years old, 86 percent of them are homeowners," says Mayer. "If what we’ve done is just push back the age at which people become homeowners, I don’t find that particularly alarming. Young people are suffering from student debt and other issues. But if we’re really going to move to a renter society, we’re going to have a lot of problems."

Starting with: Where will today’s young people live? And what will they live on -- if not accumulated home equity—when they’re old and gray?

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.
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The other side of the home owner story is that if you buy a home you are stuck in that location and are not mobile enough to go to where the jobs are. There is not much wealth in owning a home that nobody wants because all the high paying jobs that help pay the mortgage left. Once again economist are looking backwards at what was not doing any forward thinking.

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