Las Vegas Home-Ownership Rate: Officially 59%, But Effectively 15%
How is the "effective" home-ownership rate different from the official one? The authors of the New York Fed study removed those homeowners who have negative equity -- those who are "underwater" and owe more on their mortgage than their home is worth.
High Hurdles for Underwater Owners
The study dubs this difference between those with a deed to a home but little or no equity and those likely to retain ownership in the long run (those with equity) the "the ownership gap" (the title of the report).
The conclusion of the Fed's number-crunchers is sobering: The long-term financial hurdles facing most of those who are underwater are so high that the majority of these owners will revert to renters.
The report presumes that if someone is paying the mortgage on an underwater home but not building equity, then in effect they're "renting" the property from the mortgage holder. These underwater owners "would need to ramp up their savings by formidable amounts" to either build equity or buy a future home if they walked away from their current mortgage, says the report.
FDIC Foresaw Risk of Gap in 2006
Las Vegas, hard-hit by the housing bust, is an extreme. Nationally, the official home-ownership rate is a still lofty 67.2%, barely down from its housing-bubble peak of around 69%. The Fed study reckons the "effective" rate is about 62%, an "ownership gap" of 5.6%.
Not everyone is surprised that it's come to this. In fact, the Federal Deposit Insurance Corporation (FDIC) issued a report in March 2006, titled "Scenarios for the Next U.S. Recession" which contained this chart.
The FDIC observed that home-ownership rates had jumped with the advent of low-down or no-down payment mortgages, interest-rate only, and variable-rate mortgages -- loans that came to be lumped under the "subprime" banner.
In essence, households that couldn't afford to buy a house were now qualified to do so, but under terms which put them at heightened risk of default. The FDIC identified three such risks:
- increased leverage due to "piggy-back" loans for down payments and no-down-payment loans
- some borrowers with option ARMs (adjustable rate mortgages) did not fully understand the potential variability of their payments going forward, i.e. that their monthly payments could skyrocket
- credit risk associated with these "innovative mortgages" were difficult to evaluate
Foreclosure Pipeline Is Full
That doesn't sound too bad until we recall that about one-third of all homes are owned "free and clear" in the U.S. According to the U.S. Census, there are 51 million homes with mortgages and 23.8 million homes without mortgages.
What that means is that the home-ownership statistics include 24 million people who don't even have a mortgage and thus are at low risk of losing their homes. The number that counts is the delinquency and default rate for those with mortgages.
Unfortunately, the foreclosure pipeline is still full. According to the Mortgage Bankers Association, about 14% of all mortgages are delinquent or in default.
Many insiders find it troubling that government agencies are guaranteeing the vast majority of new home mortgages via Federal Housing Administration (FHA), Fannie Mae and Freddie Mac.
The head of the FHA, David H. Stevens, recently told a Mortgage Bankers Association conference, "This is a market purely on life support, sustained by the federal government." In testimony before a House subcommittee, Stevens acknowledged that about 20% of FHA loans insured last year, and as many as 24% of those from 2007, faced foreclosure.
Silver Lining: Principal Payments
There's a potential long-term silver lining to the situation. Over time, those homeowners making principal payments on conventional home loans will pay down their mortgages and eventually start building equity. The New York Fed study estimated that 51% of "underwater" homeowners making principal payments will be back "above water" within five years.
The number of homeowners who get above water and the time that will take depends on what happens to home prices in the next five years. Further declines would lengthen the time needed to start building equity, and any improvement would speed up that process.