Housing Price Bubble Deflating Faster Than Debt Bubble

Americans may not have equity any more, but they’ve still got plenty of mortgage debt:

Even though the amount of home mortgage debt outstanding declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain distressingly high.

Home mortgage debt outstanding was 73% of gross domestic product last year, according to government data. That’s the third-highest reading on record, after the 75%-plus bubble years of 2006 and 2007.

Getting that ratio down to a more manageable number will mean more lean years ahead, as Americans further cut spending to rebuild their savings and banks struggle to boost their capital amid heavy loan losses.

How long this process might take is a key question for those trying to gauge the prospects for an economic recovery.

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy – a course of action that will do little to solve the problem of too much debt.

This explains in part why government is hoping to keep home prices from falling.  It does not explain however, what government will do when their hopes are dashed.

 

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2 Comments for this entry

  1. John M. says:
    May 28, 2009 at 5:51 AM

    Americans. Saving. Who knew?

    (Slightly) younger Doomers will be in for a surprise (Igor says, “bizarre”) if they dip into the “Related Videos.” Ah, wheels within wheels …

  2. toysarefun says:
    May 30, 2009 at 7:13 AM

    That’s what cashing out and 2nd mortgages will do, oh, not to mention the housing crashers.

    I’m sure years from now, this whole debacle will be looked at quite differently than it is now.

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