Fed Study Finds ‘Real’ Homeownership Rate

If you don't consider underwater loan owners true home owners, the home ownership rate drops significantly.

Irvine Home Address … 54 DESERT WILLOW Irvine, CA 92606

Resale Home Price …… $960,000

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Cheryl Lynn — Got to Be Real

Fed Study Finds ‘Real’ Homeownership Rate

The U.S. homeownership rate, already down two percentage points from its 2006 peak of 69%, could fall by another five percentage points over the coming years to levels last seen in the mid-1990s, says a staff report from the Federal Reserve Bank of New York.

The study looks at the number of homeowners who are underwater, owing more than their homes are worth, and excludes them from the official homeownership rate calculated every quarter by the Census Bureau.

While the official figure stood at 67.2% at the end of last year, the authors produce their own estimate of an “effective” homeownership rate. The difference between the official and effective homeownership rates, or what the authors dub the “homeownership gap,” is around 5.6 percentage points for the nation as a whole, which means the effective rate of homeownership is closer to 62%.


That homeownership gap is much bigger in cities that have seen big home-price declines. In Las Vegas, for example, the gap stands at more than 40 percentage points. So while Sin City’s official homeownership rate stood at 58.6% as of August 2009, the effective homeownership rate was closer to a paltry 14.7%. (That estimate uses the Case-Shiller home-price index to predict the number of underwater borrowers; estimates from the Federal Housing Finance Agency’s price index, which have less-severe price declines, produces an effective rate of 19.3%.)

In Phoenix, the effective homeownership rate stands at 40.6%, compared to an official rate of 68.8%. Las Vegas and Phoenix had peak homeownership rates of 65% and 74.7%, respectively, during the middle of the last decade. That means Phoenix, in less than five years, has gone from having one of the highest homeownership rates in the country to having one of the lowest effective rates of homeownership.


Other cities with double-digit homeownership gaps include San Diego, Los Angeles, San Francisco, Miami, Tampa, Detroit, and Washington, D.C.

The effective rate of homeownership doesn’t imply that all underwater borrowers will lose their homes; instead, it suggests that they won’t act as traditional homeowners do. Government policy over the past two decades focused on growing the rate of homeownership for public policy reasons: Homeowners, the argument went, were more invested in maintaining not only their properties, but also their communities.

The effective homeownership rate serves as a “good guide to the future path of the official rate” because many underwater homeowners are simply renters-in-waiting, write authors Andrew Haughwout, Richard Peach and Joseph Tracy of the New York Fed. “Unless house prices increase substantially, many negative equity homeowners will in fact convert to renters in the years ahead, and the measured rate of homeownership will decline toward the effective rate.”

Some underwater borrowers, of course, will return to positive equity simply through the scheduled debt pay-down process. The study estimates that 36% of negative equity borrowers will recover their equity within three years, while 51% will be back “above water” within five years. That will speed up or slow down depending on what happens to home prices.

But homeowners will need to build up equity in order to move, which requires cash both for paying transaction costs associated with selling the old home and for a down payment for the new home. Absent any increase in home prices, it would take at least five years for 90% of borrowers who are underwater today return to a 94% loan-to-value. Moreover, the median mortgage in that group of borrowers would take 12 years to reach a 94% loan-to-value, without any home-price appreciation.

Peak buyers who lost it all

Today's featured property was purchased on 1/27/2006 for $1,315,000. The owners used a $951,750 first mortgage and a $363,250 down payment.

These owners lost $363,250 of their own money, and their credit is trashed.

Foreclosure Record

Recording Date: 04/06/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 11/18/2009

Document Type: Notice of Default

Irvine Home Address … 54 DESERT WILLOW Irvine, CA 92606

Resale Home Price … $960,000

Home Purchase Price … $1,315,000

Home Purchase Date …. 1/27/2006

Net Gain (Loss) ………. $(412,600)

Percent Change ………. -31.4%

Annual Appreciation … -6.9%

Cost of Ownership


$960,000 ………. Asking Price

$192,000 ………. 20% Down Conventional

4.80% …………… Mortgage Interest Rate

$768,000 ………. 30-Year Mortgage

$194,276 ………. Income Requirement

$4,029 ………. Monthly Mortgage Payment

$832 ………. Property Tax

$550 ………. Special Taxes and Levies (Mello Roos)

$80 ………. Homeowners Insurance

$175 ………. Homeowners Association Fees


$5,666 ………. Monthly Cash Outlays

-$976 ………. Tax Savings (% of Interest and Property Tax)

-$957 ………. Equity Hidden in Payment

$352 ………. Lost Income to Down Payment (net of taxes)

$120 ………. Maintenance and Replacement Reserves


$4,205 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$9,600 ………. Furnishing and Move In @1%

$9,600 ………. Closing Costs @1%

$7,680 ………… Interest Points @1% of Loan

$192,000 ………. Down Payment


$218,880 ………. Total Cash Costs

$64,400 ………… Emergency Cash Reserves


$283,280 ………. Total Savings Needed

Property Details for 54 DESERT WILLOW Irvine, CA 92606


Beds: 5

Baths: 4 baths

Home size: 3,200 sq ft

($300 / sq ft)

Lot Size: 5,372 sq ft

Year Built: 2006

Days on Market: 185

Listing Updated: 40340

MLS Number: S600246

Property Type: Single Family, Residential

Community: Columbus Grove

Tract: Alex


Plan 3 Alexandria. This is the largest and finist model in Columbus Grove. Coupled with the Irvine School District. Every conceivable upgrate. Over $100k in landscaping. This is absolutely spectacular.

upgrate? finist?

16 thoughts on “Fed Study Finds ‘Real’ Homeownership Rate

  1. Chris

    OT: Keynesians vs Austrians.

    Let’s see who will win this time. Keynesians did not exactly lift this economy out of its funk (although Irvine housing price is still in the ridiculous stratosphere).

    1. Me

      I know an even more tragic DP story. My bro in law put down around 400k on a house in Ladera that he bought for 800k. Today he is still there making his payments because he put soo much down in order to have an affordable mortgage.
      That 400k is gone. I think his house is apraising around 600k. But in the end I expext it to be worth 4-500k.
      Btw he doesn’t make much money and he got the 400k as inheritance. Sad.

  2. cara

    So, if it sells for list, the price of their credit score was only about $50k. I.e. if they had only had $50k more on hand to bring to the table they could have kept their credit intact.

    (Plus 5-7 months of mortgage payments, which at 6% interest on an 30-year amoritizing schedule would have been another $40k).

    At a guess that DP had to have been move-up bubble gains, because anyone who could have saved up $300k out of income wouldn’t have had a problem setting aside another $100k.

    No way to know of course.

  3. scottinnj

    Why would they have put down a 20-ish % downpayment in 2006 in the first place? I’d think that back in 2006 they could have got away with a 5% downpayment. This isn’t HELOC abuse but it was not well designed financing for the market in 2006.

    1. 20% DP is small

      20 to 50% down payments in Irvine have always been very common even during the bubble years.

    2. IrvineCitizen

      Because this owner probably had a really nice first house in Irvine that they bought in 1999 for $350,000. It was probably 3 bed, 2 bath and 1800 square feet in a nice established neighborhood with no MelloRoo fees and 6K in annual property taxes.

      However, every neighbor was moving out and up into Columbus Grove and Woodbury and they had 3200 square foot homes with granite everywhere and 20×20 kitchen islands and this family KNEW they deserved it too.

      So they sold that nice home for $720K and promptly took their entire profit and used it as a down payment for this new home to make their payments as low as possible. Hell, they paid 1.3M for it but ONLY owed 951K on the mortgage. In three years it would be worth close to 2M and they would have over 1M in profit.


      1. flyovercountry

        I agree that much of the down payment probably came from “move-up” profit on the previous home. I feel bad for them to have lost that down payment, but it was illusionary paper profit on the previous house anyway.

        The thing that is sad is that if they had stayed put in their previous home, they would still be in the money on that house.

        (assuming that scenario above is what actually happened)

        1. IrvineCitizen

          Well I’ll tell you right now that your scenario is correct. How do I know? Because we purchased our home new in 1999 for $350K and now have it paid down to $260K. We refinanced last year to get a 4% rate on the 260K and it was appraised at $730K.

          There was a small core of us that didn’t want to move up and out – not because we didn’t want nicer things but because we were comfortable with the middle-of-the-road things we already had.

          So now I’m up $500K with a $1200 mortgage payment and they’re all in default with nothing in the bank and trashed credit. They come to our parties all the time – still driving the Mercedes as our 12 year old Camry creeps along….

      2. newbie

        Called doubling down in Vegas or leaveraging in RE. Either term, there’s risk involved. Risk to whom depends on who’s money is on the table.

        This owner looks as if his own money was one the table. Sad, but at least the bank is not demanding and govt force me to put my money on the table after the money was lost. Too bad the banks and govt are forcing the taxpayers to pay for the bad bets and shut out of the winnings.

  4. Alan

    How did they spend $100k on landscaping? From the Google View, the roofs nearly touch to the adjacent houses, and then there are streets on the other 2 sides. There is no land to scape?

    Good job of taking one for the banking team though. There needs to be a long string of good folks putting $350k into houses and letting it go poof. Now kindly leave to make room for the next one to put some cash in.

    1. newbie

      Sad but true.
      Funny how 2 weeks ago, the economical picture was all so rosy, but starting Monday all was bad news. The stock market is more gambling with loaded dice than investing on companies.

      Fool me once shame on you, fool me 100 times ….

    2. dilbert dogbert

      I flew down on Google Maps too. Noted the small lot and the apartment houses across the street. Wow $1mil for a house in an apartment neighborhood.

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