N.Y. Fed Researchers Study ‘Effective’ Rate Of Homeownership

rge will the decline in the homeownership rate ultimately prove to be? That's the question that three authors raise in a new study published by the Federal Reserve Bank of New York. To address this question, authors Andrew Haughwout, Richard Peach and Joseph Tracy 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. According to the trio, negative-equity homeowners will face such daunting saving requirements to retain their home or purchase a new home that they will very likely convert to renters over time. Thus, the effective rate may serve as a useful guide to the future path of the official rate. For the nation, the effective rate of homeownership calculated by the authors is 5.6 percentage points below the official homeownership rate. For certain metropolitan areas hit hard by the boom and bust in the housing market – Las Vegas, Miami and Phoenix, for example – the effective rate falls short of the official rate by a dramatic 20 to 39 percentage points. In an appendix to their article, Haughwout, Peach and Tracy consider the extent to which public policy initiatives such as mortgage modifications can help to reduce foreclosures and to enable negative-equity homeowners to save for a new house. The authors conclude that the effectiveness of mortgage modification programs will vary with their structure: Programs that reduce the principal balance on the mortgage will be appreciably more effective in supporting homeownership than those that simply lower the interest rate and extend the term of the loan. Haughwout and Peach are both members of the New York Fed's research and statistics group, while Tracy is an executive vice president in the chief of staff's office at the regional Reserve Bank. SOURCE: [link=http://www.newyorkfed.org/research/current_issues/ci16-5.pdf]Federal Reserve Bank of New York


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