Across the Internet news sites today, you can find melodramatic headlines like this one: "American dream fades for more as homeownership falls," from CNN Money. For starters, homeownership should be not considered a part of the American dream. Second, these articles are based on a report released today by the Census Bureau that provides quarterly homeownership rate data. Although fewer Americans owned homes last quarter, the rate didn't fall. That's actually shocking good, considering how utterly bad the housing market situation is. It could be much worse, and probably eventually will be.

In the third quarter, like in the second, the homeownership rate was 66.9%. That's down from a peak of 69.2% in the second quarter of 2004. Is that terrible? Not if you consider it in a historical context. Here's a chart showing homeownership since 1965:

homeownership rate 2010-q3.png

You can see the housing boom's influence very clearly, beginning in the late 1990s. The homeownership rate marched confidently upwards until around 2006, and then it began to decline, as the bubble deflated.

But look at the rate prior to the late 1990s. It averaged between 63% and 65% for nearly the entire time, except for a brief period in the early 1980s when it rose to near 66%. So the real surprise here isn't that homeownership has fallen as the housing market has collapsed -- it's that the rate remains so high in spite of the market's woes.

If there is a sort a "natural rate" of homeownership, sort of like the natural rate of unemployment, then homeownership will continue to decline, back to sub-65% levels. As banks and servicers continue to work through the large inventory of defaulted mortgages, that's probably a likely scenario. So watch for this rate to drop further over the next few years. And that's okay -- the U.S. was doing quite well from 1965 through 1997 when homeownership was mostly below 65%.

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