PrintNew_York_Fed_on_Homeownership.pdf
A new study by economists at the New York Federal Reserve suggests that “effective” homeownership rates have fallen as much as 25 to 45 percent below actual homeownership rates in metropolitan markets that have been hit hardest by falling property values.
Nationally, homeownership peaked at 69 percent in the third quarter of 2006, but the official homeownership rate “will experience significant downward pressure” in the coming years, according to the staff report as dramatic increases in negative equity reduce incentives to own rather than rent.
Lower property values create incentives for homeowners to behave more like renters than owners, the economists argue, creating an effective homeownership rate of 63.6 percent I the first quarter of 2009, 3.9 percent below the measured rate. Owners suffering negative equity are financially stretched, have less of a motive to maintain their properties.
Negative equity is also contributing to reduced savings rates, lowered household net worth, and significantly lower levels of household mobility, the study said.
In major markets where home values have fallen the most, the gap between effective and measured rates has grown much greater. It is as large as 45 percent in Las Vegas, 33 percent in Phoenix, 30 percent in Detroit, and 26 percent in San Diego, according to the paper.
Declining effective homeownership will have negative impacts on traditional social benefits of homeownership such as well-maintained properties, better local schools, and stronger communities. It may also undermine popular support for public policies that support homeownership such as the mortgage interest deduction and federal housing programs.
“Public policy has long promoted homeownership, and subsidies for owner-occupants are an important feature of the tax code… Reductions in the homeownership rate may create a large set of residents who may be less invested in the long run outlook for their homes and communities. This could yield lower levels of home maintenance and civic participation, as well as more short-sighted decisions in local affairs,” the economists predicted.
The staff report from the Federal Reserve Bank of New York was written by Andrew Haughwout, Richard Peach and Joseph Tracy.
For a copy of the study, click on the file at the top of the story.
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