The Great Homeownership Reset

Market forces are already causing a significant reset in America's housing system -- and a lot quicker than most people imagine.

Earlier this week, I argued that America's penchant for homeownership distorted the economy, and that it makes good economic sense to tilt the balance of homeownership back from its high point of 70 percent to roughly 55 or 60 percent -- about the level found in the most innovative, affluent, and highly skilled regions. The Urban Land Institute projections (PDF) already predict the homeownership level will fall back to 62-64 percent as a result of the downturn, tighter credit conditions, and demographic shifts.

This new study by economists at the New York Fed (via Tracy Alloway of the Financial Times Alphaville) suggests an even bigger homeownership reset is underway. Their analysis takes into account owners who are currently underwater on their homes. The study suggests that those who owe more on their homes than they are worth are likely to turn into renters as time goes on. Take them out of the picture and the "effective rate" of homeownership drops by 5.6 percent, from the current official rate of  67.2 percent to 61.6 percent. That's getting pretty close to the  reset rate of 55-60 percent I suggested. Here's a chart from their paper. (There's also substantial variations by region, as you can see here.)

Source: Andrew Haughwout, Richard Peach, and Joseph Tracy, The Homeownership Gap, New York Fed (via FT Alphaville).

Alloway points to one last bonus figure from the the Fed analysis:

The authors have calculated the additional amount of money Americans would need to save to boost themselves out of negative equity. That is, to close out their existing negative equity and buy a new home in five years time. The sums are pretty staggering: That's an additional $92bn every year for five years. In other words, the US personal savings rate would have to increase about 0.8 percentage points, to 5.1 per cent. So that's saving an additional $1,222 a month, or renting. What price the American dream, America?

That's the question President Obama and his economic team need to be asking now.