Homeownership is often thought of as an integral part of the American dream, and encouraging homeownership has historically been an important feature of U.S. public policy. Figure 1 provides a time series of the aggregate homeownership rate published by the US Bureau of the Census.

After rising for a decade, the homeownership rate peaked at 69 percent in the
third quarter of 2006. Over the next three  years, as home prices declined in many parts of the country and the unemployment rate rose sharply, the  homeownership rate declined by 1.7 percentage points to its current level of 67.3 percent – a level  last seen in the second quarter of  2000. The current decline in the homeownership rate is approaching in magnitude the 2.3 percentage point decline observed in the early 1980s.

The collapse of the housing boom with the concomitant increase in unemployment, decline in house prices, and rise in foreclosures has exerted downward pressure on the homeownership rate. Foreclosures put downward pressure on the homeownership rate to the extent that the household which loses its home to foreclosure reverts to renting and that the purchaser of the foreclosed property is not a first time homebuyer. An  question of broad interest is how large will the ultimate decline in the homeownership rate be over what has turned out to be the most severe economic downturn since the Great Depression of the 1930s? While this question cannot be answered with great precision, it would be helpful to have a gauge of the ongoing downward pressure on the homeownership rate over the next several years.

In this paper, we explore the economics of homeownership in more detail and introduce notion of a “homeownership gap” as a useful guide to the likely decline in the homeownership rate. We begin by describing the public institutions that are designed to support the purchase of a home, and the logic behind these policy choices. We then turn to a discussion of how the official statistics on homeownership can obscure an important dimension of the ownership experience: owners’ equity. We present an alternative measure of homeownership that is particularly relevant when house prices are declining, as they have been recently in many markets. Homeownership under our alternative measure is substantially below the official rate, a fact which may have important implications for the future path of the homeownership rate and for household saving behavior.

From the conclusions:

The current severe house price cycle, combined with borrowers who had little or no equity at origination of their mortgages, has led to a dramatic rise in homeowners with negative equity and, therefore, a large gap between the measured and effective homeownership rates. In some of the worst hit metropolitan areas, effective homeownership rates are 25 to 45 percentage points below the measured rate. This situation is likely to put downward pressure on future homeownership rates, and has potentially important implications for the maintenance of the housing stock, the stability of neighborhoods, and future household saving behavior.