US homeownership minus negative equity = 61.6% | FT Alphaville

US homeownership minus negative equity = 61.6%

Knock 5.6 percentage points off the American dream: US home ownership.

Doing that will effectively strip out those homeowners currently in negative equity, according to a Federal Reserve paper by Andrew Haughwout, Richard Peach and Joseph Tracy.

The idea is that those who owe more than their homes are worth are more likely to become renters — not owners — over time. If you strip these people out of the official rate of US homeownership you get a much more accurate picture of US housing — and where the official rate is headed.

Here’s the theory:

Since the homeownership gap reflects the extent of negative equity in the housing market, it is also a gauge of the potential downward pressure on the official homeownership rate. Assuming that house prices do not appreciate over the next several years, negative equity households will very likely convert to renters when they move out of their current homes because they will be unable to save enough to cover the negative equity, the transaction costs of selling their existing home, and a down payment on another home. As these transitions from owning to renting take place, the homeownership gap will narrow, with the official homeownership rate dropping toward the effective rate. In this sense, the effective homeownership rate is a useful guide to the future course of the measured homeownership rate. Of course, negative equity homes that come onto the market may be purchased by individuals who are currently renters—an outcome that would mitigate the effect on the official homeownership rate. However, the number of foreclosed houses purchased by former renters is likely to be limited.

Doing that gives you a US homeownership figure that’s 61.6 per cent — 5.6 percentage points below the official rate of 67.2 per cent. But that ‘homeownership gap’ conceals a rather amazing regional variation. For instance, the gap for certain cities is as much as 39 percentage points. Click to enlarge:

Here’s one last number from the paper to consider.

As a not-so-fun bonus, the authors have calculated the additional amount of money Americans would need to save to boost themselves out of negative equity. That is, to close out their existing negative equity and buy a new home in five years time. The sums are pretty staggering:

That’s an additional $92bn every year for five years. In other words, the US personal savings rate would have to increase about 0.8 percentage points, to 5.1 per cent.

So that’s saving an additional $1,222 a month, or renting.

What price the American dream, America?

Related links:
Chinese personal savings: An over/under bet – Paul Kedrosky
The slow death of Hamp, the summer of delinquencies – FT Alphaville
Get ready, get set, deleverage! With one notable (US) exception – FT Alphaville
The American dream – FT Alphaville