Is the homeownership rate really ten percent lower than the Census Bureau says it is?

Since owners of 10.8 million homes owe more on their mortgage than their homes are worth, a decline from 11 million in the second quarter, they act more like renters than homeowners, suggests the Q3 report on negative equiay from CoreLogic.

“An alternative definition of homeownership is to exclude owners with negative equity, which nets the effective homeownership rate. Adjusting for severe negative equity of 25 percent or more reveals that the effective homeownership rate as of Q3 was 62.4 percent or 4.5 percentage points lower than the official rate. Removing all negative equity homeowners reveals an effective homeownership rate of 56.6 percent or over 10 percentage points lower than the official rate,” the report states.

Foreclosures of severely negative equity properties rather than an increase in home values were responsible for the slightly improved negative equity report. In fact, it was the third consecutive quarterly decline in negative equity for residential properties.

During this year the number of borrowers in negative equity has declined by over 500,000 borrowers. An additional 2.4 million borrowers had less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.

The largest declines in negative equity were concentrated in the hardest hit states. Alaska experienced the largest decline, falling 1.8 percentage points, followed by Nevada (-1.6), Arizona (-1.4), California (-1.2), and Florida (-0.9). Idaho and Alabama are the only states with noticeable increases, which is not a surprise given they are currently the two top states for home price depreciation.

Although the level of negative equity is very high, there are still many homeowners with equity (Figure 4). Nearly half of New York borrowers have 50 percent or more positive equity, which leads the nation, followed by Hawaii (43 percent), Massachusetts (40 percent), Connecticut (39 percent) and Rhode Island (40 percent).

“Negative equity is a primary factor holding back the housing market and broader economy. The good news is that negative equity is slowly declining, but the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity,” said Mark Fleming, chief economist with CoreLogic.