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.

My Wall Street Journal column today asked: “Is Homeownership Overrated?“ And NPR’s Planet Money’s Question of the Day asks: “Is Owning a Home Overrated?”

The rate of homeownership in America is already starting to fall back on its own. From a high of almost 70% during the bubble years, homeownership has fallen to roughly 67%; slightly less than 39% of Americans between ages 18 and 35 own their own home, down from 43% in 2005. The Urban Land Institute projects that homeownership may fall to 62% over the next decade or two.

I’m not saying that Americans should give up on homeownership. Those who plan to stay in one place, who have secure jobs, and who can afford to should still buy homes. We need only tilt the balance, reducing the current homeownership rate from our current rate of just over two-thirds to perhaps 55% or 60%, comparable to that of the most economically vibrant regions. It’s in our economic interest to help make that happen.

A new study by the American Apartment Association (via Bob Massey) provides data from a May Harris survey of 2,000 Americans finding additional evidence of an ongoing Great Reset around housing.

• More than three-quarters of those surveyed felt renting was preferrable to owning in the current economic environment.
• Nearly two-thirds cited not having responsibility for major repairs or maintenance as the primary advantage for renting.
• 50 percent said renting offered financial reasons for preferring to rent.
• A third cited the unpredictable real estate market and not being susceptible to foreclosure.
• 60 percent of renters plan to continue renting their current residence or rent new residences within the next year, and just 12 percent have plans to buy.

Chris Brogan on The Great Reset:

Richard Florida posted about The Great Car Reset, talking about how America’s passion for cars might be waning a bit. In another story, with video, Florida talked about how we should rethink home ownership …

I grew up thinking home ownership was the goal. I have a loft in northern Massachusetts that’s about 955 square feet, with a wife and two kids and two cats in it. It’s a wee bit small. So, I’ve been thinking about homes and clicking the occasional real estate link that Kat sends me. But do I want to own?

We use to think homes were important places to store equity. Wow, that sure didn’t work out for a lot of people in the last few years. Even if a home stores equity, you can’t actually get at that money until you sell, so it’s money that’s not being used. In essence, it’s not earning you anything if it’s just sitting there in the home, still. So, a home as a simple residence isn’t exactly a great investment these days (at least by some people’s thinking).

What about cars? Cars depreciate the moment you buy them. They rarely go up in value. They require maintenance, parking fees, etc. And we usually own cars when we live in the suburbs, but that brings us back to the real estate question, and whether or not we even want to be in the suburbs any more. If we reurbanize, if we rethink our cities, if we rework how we work, would we need to throw $20,000 or more into something that just moves us from A to B?

I’m just throwing this all out there to talk about, to think about.

Declining housing prices combined with (artificially) low mortgage interests rates are combining to bring the costs of owning more in line with renting, according to the Wall Street Journal (h/t: Alison Kemper):

The relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices. At the height of the housing boom, as home prices surged, demand for rentals started to rise as the gap between owning and renting widened significantly. Even after the housing market soured, apartment demand grew as former homeowners became renters, allowing landlords to push healthy rent increases.  Now, after two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

True, when you factor in massive government incentives for homeownership, and that is only in certain markets. But this kind of thinking misses the bigger issue of the long run. In addition to the issue of month-to-month housing affordability, homeownership carries with it a second, longer-run cost – the cost of exit. In a mobile society, people need to be able to sell their homes. Take the example of homeowners in say Pittsburgh or Detroit or just about any market these days. They got a great deal on a wonderful, affordable home, but then their employment dries up. They’re offered a job say in Seattle or Washington, D.C. and need to move. But they’re locked into a house they can’t sell. If they were renters they could easily up and move.

In today’s economy, many people are better off paying a considerable premium to rent, if they think they might need to move for career or family or lifestyle reasons.

And I continue to believe that we need to put in place a new housing system which can and should make renting easier, more flexible, and even more affordable.

Whether they favor cities, suburbs or the countryside, almost half wish they lived somewhere else, the report found. Denver, San Diego and Seattle are the top picks of the 30 largest metropolitan areas. Denver is the favorite city among Republicans, and it also rates well with Democrats and independents … In addition to Denver, favorite cities among Republicans are Phoenix, Orlando and San Antonio. Half of all liberals would like to live in San Francisco, more than double the share of conservatives. San Diego, once a bastion of conservatism, appeals to Democrats, liberals and moderates.

46% would prefer to live in a different type of community from the one they now reside. Adults 50 to 64 who live in cities are the least likely to say they live in the ideal place; two-thirds of those in that age group who live in the country say they couldn’t imagine living anywhere else.

Young people are the opposite: 57% of urban dwellers younger than 30 say the city is where they want to live. … “Fewer than half of all city residents say there is no better place to live than in a city.” … A smaller proportion of women express the desire to live in the nation’s largest cities  … Wanting to live outside cities doesn’t necessarily mean people reject urban lifestyles, however. The appeal of developments with an urban flair — ones that combine housing, stores and offices in a neighborhood setting — is growing.

My main take away: America’s two great dreams – the dream of unlimited economic opportunity and to own a single family home – are running head on into one another. Home ownership means less economic mobility when you can’t sell your home. The big cost of the housing crisis may not be what’s happening in the financial markets, it may be the long-run competitive damage caused by sagging labor mobility and the inability to flexibly match the location of workers to the location of jobs.

Sure, I know they call it a money pit. And the money pit has turned into a financial death sentence for too many Americans. But it’s a veritable truism that owning a house makes you happy. It’s the pinnacle of the American Dream after all. Not so fast. According to this comprehensive study by the Wharton School’s Grace Wong, those who own their own homes are in fact a less happy lot than those that do not. Here are some of the study’s key conclusions.

I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home… They are also more likely to be 12 pounds heavier, report lower a lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships… Contrary to popular belief, I do not find significant differences in family-related time use patterns, family-related affect, number of normal work hours, indicators of stress or measures of self-esteem and perceived control of life by homeownership …

Homeowners are happier on average only on an unadjusted basis. Once household income, housing quality and health are controlled for, they are no happier than renters. What’s more, they report to derive more pain from both the neighborhood and their house and home. This positive pain gap remains stable and robust when health, neighborhood characteristics and financial stress are controlled for. As for the most frequently cited channels of a positive impact by homeownership, namely self-esteem, stress, health and family life, again there is very little supporting evidence in my data… [H]omeowners spend less time on active leisure activities or with friends, which have been documented as some of the most enjoyable affective experiences.

We can only hope policy-makers take this into account when think about what to do on the housing front.