The U.S. homeownership rate, already down two percentage points from its 2006 peak of 69%, could fall by another five percentage points over the coming years to levels last seen in the mid-1990s, says a staff report from the Federal Reserve Bank of New York.
The study looks at the number of homeowners who are underwater, owing more than their homes are worth, and excludes them from the official homeownership rate calculated every quarter by the Census Bureau.
While the official figure stood at 67.2% at the end of last year, the authors produce their own estimate of an “effective” homeownership rate. The difference between the official and effective homeownership rates, or what the authors dub the “homeownership gap,” is around 5.6 percentage points for the nation as a whole, which means the effective rate of homeownership is closer to 62%.
newyorkfed.org
That homeownership gap is much bigger in cities that have seen big home-price declines. In Las Vegas, for example, the gap stands at more than 40 percentage points. So while Sin City’s official homeownership rate stood at 58.6% as of August 2009, the effective homeownership rate was closer to a paltry 14.7%. (That estimate uses the Case-Shiller home-price index to predict the number of underwater borrowers; estimates from the Federal Housing Finance Agency’s price index, which have less-severe price declines, produces an effective rate of 19.3%.)
In Phoenix, the effective homeownership rate stands at 40.6%, compared to an official rate of 68.8%. Las Vegas and Phoenix had peak homeownership rates of 65% and 74.7%, respectively, during the middle of the last decade. That means Phoenix, in less than five years, has gone from having one of the highest homeownership rates in the country to having one of the lowest effective rates of homeownership.
newyorkfed.org
Other cities with double-digit homeownership gaps include San Diego, Los Angeles, San Francisco, Miami, Tampa, Detroit, and Washington, D.C.
The effective rate of homeownership doesn’t imply that all underwater borrowers will lose their homes; instead, it suggests that they won’t act as traditional homeowners do. Government policy over the past two decades focused on growing the rate of homeownership for public policy reasons: Homeowners, the argument went, were more invested in maintaining not only their properties, but also their communities.
The effective homeownership rate serves as a “good guide to the future path of the official rate” because many underwater homeowners are simply renters-in-waiting, write authors Andrew Haughwout, Richard Peach and Joseph Tracy of the New York Fed. “Unless house prices increase substantially, many negative equity homeowners will in fact convert to renters in the years ahead, and the measured rate of homeownership will decline toward the effective rate.”
Some underwater borrowers, of course, will return to positive equity simply through the scheduled debt pay-down process. The study estimates that 36% of negative equity borrowers will recover their equity within three years, while 51% will be back “above water” within five years. That will speed up or slow down depending on what happens to home prices.
But homeowners will need to build up equity in order to move, which requires cash both for paying transaction costs associated with selling the old home and for a down payment for the new home. Absent any increase in home prices, it would take at least five years for 90% of borrowers who are underwater today return to a 94% loan-to-value. Moreover, the median mortgage in that group of borrowers would take 12 years to reach a 94% loan-to-value, without any home-price appreciation.
Peak buyers who lost it all
Today's featured property was purchased on 1/27/2006 for $1,315,000. The owners used a $951,750 first mortgage and a $363,250 down payment.
These owners lost $363,250 of their own money, and their credit is trashed.
Foreclosure Record Recording Date: 04/06/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 11/18/2009 Document Type: Notice of Default
Home Purchase Price … $1,315,000 Home Purchase Date .... 1/27/2006
Net Gain (Loss) .......... $(412,600) Percent Change .......... -31.4% Annual Appreciation … -6.9%
Cost of Ownership ------------------------------------------------- $960,000 .......... Asking Price $192,000 .......... 20% Down Conventional 4.80% ............... Mortgage Interest Rate $768,000 .......... 30-Year Mortgage $194,276 .......... Income Requirement
$4,029 .......... Monthly Mortgage Payment
$832 .......... Property Tax $550 .......... Special Taxes and Levies (Mello Roos) $80 .......... Homeowners Insurance $175 .......... Homeowners Association Fees ============================================ $5,666 .......... Monthly Cash Outlays
-$976 .......... Tax Savings (% of Interest and Property Tax) -$957 .......... Equity Hidden in Payment $352 .......... Lost Income to Down Payment (net of taxes) $120 .......... Maintenance and Replacement Reserves ============================================ $4,205 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $9,600 .......... Furnishing and Move In @1% $9,600 .......... Closing Costs @1% $7,680 ............ Interest Points @1% of Loan $192,000 .......... Down Payment ============================================ $218,880 .......... Total Cash Costs $64,400 ............ Emergency Cash Reserves ============================================ $283,280 .......... Total Savings Needed
Property Details for 54 DESERT WILLOW Irvine, CA 92606 ------------------------------------------------------------------------------ Beds: 5 Baths: 4 baths Home size: 3,200 sq ft ($300 / sq ft) Lot Size: 5,372 sq ft Year Built: 2006 Days on Market: 185 Listing Updated: 40340 MLS Number: S600246 Property Type: Single Family, Residential Community: Columbus Grove Tract: Alex ------------------------------------------------------------------------------ Plan 3 Alexandria. This is the largest and finist model in Columbus Grove. Coupled with the Irvine School District. Every conceivable upgrate. Over $100k in landscaping. This is absolutely spectacular.
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