Are Underwater Homeowners Actually Renters?

Should a person who owns a home yet is severely underwater on their mortgage be considered a renter rather than a homeowner? According to a new research report entitled The Homeownership Gap from three economists at the New York Fed, the answer is yes.

New York Fed economists Andrew Haughwout, Richard Peach and Joseph Tracy contend that Census Bureau’s data indicating there is a 67.1 percent homeownership rate in the country is overstated, and that some homeowners with negative who owe more on their mortgages than their homes are worth should be counted as renters. Their basis is that many of these people will find it next to impossible to save enough money to actually own their homes or purchase another one in the future.

In there report, the authors propose the concept of a “homeownership gap” as a gauge of the downward pressure on the homeownership rate. They define the homeownership gap as the difference between the official homeownership rate tabulated by the Census Bureau and an “effective” rate that excludes owners who are in a negative equity position—that is, owners whose outstanding mortgage balance exceeds the value of their house.

Haughwout, Peach and Tracy contend that many current homeowners with negative equity will face “daunting saving requirements” in order to be able to retain their homes or purchase new homes, therefore they are very likely to convert to renters over time.

According to their calculations, the actual home ownership rate is 5.6 percent below what’s officially listed by the Census Bureau, and in cities where the real estate markets have been devastated by housing market collapses such as Las Vegas, Miami and Phoenix, the effective home ownership rates is actually a whopping 20 to 39 percent lower than the official rate.

So what would be the impact if the official homeownership rate in the country excluded negative equity homeowners?

According to the authors, “the larger social benefits that arise when individuals have an equity stake in their homes and communities may be reduced” if the official homeownership rates drops. And a revised effective homeownership rate could also have an impact on loan modification programs and other mortgage lending policies down the road.

The Homeownership Gap is certainly an interesting and compelling read, if not controversial.

Feel free to give it a look and tell us what you think of the report in the comments below.