The collapse of the housing market and the sharp rise in unemployment have caused the U.S. homeownership rate to fall to 67.2 percent, according to data from the U.S. Census Bureau -- essentially a reversion to the level of 10 years ago.[IMAGE]
""A new report"":http://www.newyorkfed.org/research/current_issues/ci16-5.pdf by economists at the Federal Reserve Bank of New York warns that the rate is likely to drop even lower, as homeowners with negative equity decide the benefits of renting outweigh the costs of homeownership.
In the study, the three authors, all holding senior-level positions at the New York Fed, raise the question: Ã¢â‚¬Å“How large will the decline in the homeownership rate ultimately prove to be?Ã¢â‚¬Â
To answer this question, they propose the concept of a Ã¢â‚¬Å“homeownership gapÃ¢â‚¬Â as a gauge of the downward pressure on the homeownership rate. The authors define the homeownership gap as the difference between the official homeownership rate tabulated by the Census[COLUMN_BREAK]
Bureau and an Ã¢â‚¬Å“effectiveÃ¢â‚¬Â rate that excludes owners who are in a negative equity position Ã¢â‚¬" that is, owners whose outstanding mortgage balance exceeds the value of their house.
The Fed economists argue that negative equity homeowners will face such daunting saving requirements to retain their home or purchase a new home that they will very likely convert to renters over time, which would make the effective rate a useful guide of the future path of the official homeownership rate, the report says.
For the nation, the effective rate of homeownership calculated by the New York Fed is 5.6 percentage points below the official homeownership rate, which means if negative equity plays out as they project and pushes underwater borrowers out of ownership, the homeownership rate could fall below 62 percent.
For certain metropolitan areas hit hard by the boom and bust in the housing market Ã¢â‚¬" Las Vegas, Miami and Phoenix Ã¢â‚¬" the effective rate falls short of the official rate by a dramatic 20 to 39 percentage points, the study shows.
In an appendix to their report, the Fed economists consider the extent to which public policy initiatives such as mortgage modifications can help to reduce foreclosures and to enable negative equity homeowners to save for a new house.
The authors conclude that the effectiveness of mortgage modification programs will vary with their structure: programs that reduce the principal balance on the mortgage will be significantly more effective in supporting homeownership than those that simply lower the interest rate and extend the term of the loan.