Even die-hard optimists must admit that the housing market is rolling over again, as I recently discussed in The New Housing Bust. Ad hoc government programs that artificially pushed demand forward have wound down. House sales are falling and inventories of houses for sale are increasing. A nationwide decrease in average home prices can't be far behind. When prices fall, more home owners become home owers—these underwater home "owners" owe more on their house than it is worth. This circumstance is called negative equity.
As of June, 11.2 million Americans were underwater on their mortgages. Of these, about 5 million were paying on a mortgage that exceeded their home's value by 25% or more. Talk about red ink—these home "owners" taken all together were $656 billion shy of getting even at current prices. (See my post The New Housing Bust.) What a disaster!
A new report from the New York Fed calculates the "effective" home ownership rate in the United States—
The severe decline in house prices in the last few years, combined with the large number of borrowers who had little or no equity at the origination of their mortgages, has led to a dramatic rise in homeowners with negative equity. This rise in turn has opened a large gap between the Census Bureau’s official homeownership rate and a measure that we term the effective rate. The effective rate recognizes that negative equity homeowners are likely to convert to renters over time and thus excludes them from the count of owner-occupied housing. The effective homeownership rate for the nation is currently 5.6 percentage points below the Census Bureau rate, and in some of the metropolitan areas hurt most by the housing crisis, the effective homeownership rate falls short of the official rate by a striking 20 to 39 percentage points.
The New York Fed's calculation subtracts home owers from home owners, and thus puts the "effective" rate of home ownership in the United States at 62%. But like all such metrics, this is merely a snapshot in time. With the housing market rolling over again, the "effective" rate could settle out at or south of 60%. We haven't seen anything like this since 1965. I first used the graph below in my post The End Of Suburbia—Really!
How bad will things get? The New York Fed analysis assumes that you "own" your house if you have a mortgage and positive equity (i.e. the house is worth more than the mortgage). They further assume that all of those with negative equity will choose to rent rather than continue to pay down a debt they can effectively never get rid of.
On July 8th the New York Times reported that the biggest defaulters on mortgages are the rich. It's easy to see why—they regard their homes (or second homes, or investor properties) as investments. For the little people, that home they owe more on than it's worth is where they live. Rather than sell it, especially if their negative equity is relatively small, these home owers might choose to tough it out & hope for the best.
For many decades the federal government pushed home ownership as the Road To Financial Salvation & Security. That entire system, which led to the push into the suburbs and the exurbs, has now fallen apart. The equity wealth lost following the collapse of the Housing Bubble will likely never be recovered. The jobs markets will remain depressed for years, and downward pressures on wages will continue. The fate of the home owers reflects our shrinking Middle Class.
Where is that American Dream now? Say goodbye...