As 2010 quickly comes to an end I sat here early this morning pondering the real estate market and reading reports on the housing industry. One thing that caught my attention was an article titled “The Mortgage Interest Deduction and Negative Equity” by Ted Gayer, the co-director of economic studies at the Brookings Institute (and occasional contributor to this blog). Ted’s article made some interesting points related to the mortgage interest deduction, negative equity and home-ownership rates in the U.S.
In his article Ted states “It seems semantically incorrect to call someone who owes more on an asset than it’s worth an “owner.”” This is a point that others have made as well and I think makes a good point. With this in mind, and in the mood to do some research and create some charts, I decided to dig into the topic deeper.
Rate of Home-Ownership in US has been falling since it’s peak in 2004…
As the chart below shows, the rate of home-ownership in the U.S. peaked in 2004 at 69.2 percent and has been falling ever-since to the most recent level of 66.9 percent at the end of the third quarter of 2010.
Source: Current Population Survey/Housing Vacancy Survey, Bureau of the Census
Do “Underwater” Homeowners Count?
I don’t have the stats for underwater homeowners in 2004, in fact I’m not even sure if the term existed back then, but I think it is probably a safe assumption to say that, during that time of rapidly rising home prices, few people were underwater. Flash forward to today, when, as reported by Corelogic, 22.5 percent of homeowners with a mortgage are underwater, meaning they owe more on their home than it is worth. Is Ted correct, should these people not be counted as homeowners? To Ted’s point I agree underwater owners don’t really own an asset, they own a liability, but they still “own” it nonetheless, at least for now. So to say that all 10.8 million of these homeowners should not be counted in the home-ownership rate is rather extreme. Having said that, if we do take them out of the count as homeowners, as the chart shows below, the rate gets pretty ugly and in fact hits an all-time low at 57.3 percent by my calculations.
Source: Current Population Survey/Housing Vacancy Survey, Bureau of the Census
A more fair approach would be to, instead of wiping out all underwater borrowers, only exclude those homeowners that are “severely” underwater, meaning they are underwater by 25 percent or more, which amounts to almost 10 percent of the homeowners with a mortgage. The chart for this is a little friendlier looking but with a rate of 62.3 percent is still a record low.
Source: Current Population Survey/Housing Vacancy Survey, Bureau of the Census
One-in-Four Homeowners Don’t Have a Mortgage
While I was pouring through census data and mortgage data focusing on negative equity I decided to take a shot at figuring out what percentage of homeowners have ZERO chance of being in a negative equity position….I’m referring to those homeowners without a mortgage of course. Interesting enough, there is about an equal number of people that own their homes free and clear (25 percent) as there are homeowners with negative equity or near-negative equity.
Where we headed?
It’s easy to see where we’ve been but it’s much harder to say where we are headed with regard to home-ownership rates in the U.S. Home prices are not rising but foreclosure rates are, so my guess is we will continue to see the home-ownership rate fall in 2011 as more and more homeowners are forced into renting. Once we get through this ugly cycle though, although, depending on the economy it could be another year or two, we will see people move back into home-ownership and the rate stop it’s downward trend. I’d say it’s going to be quite a while before we see those 2004 levels again though.
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