American Homeowners Are Nearly Back in the Black: Ritholtz Chart

Source: The Economist

Source: The Economist

Here is a fascinating albeit somewhat confusing chart: Total U.S. residential equity relative to total mortgage debt.

The problematic, even misleading part about the chart is some 30 percent of homes have been bought with no mortgage -- straight-up cash deals.

What this chart is actually showing is that in the aggregate, equity and debt are in balance. But that can be somewhat misleading, and simple mathematics explains why.

Take that 30 percent of homes purchased for cash. Once we remove them from this ratio, it becomes obvious that, collectively, those homes purchased with a mortgage are still carrying more debt than equity.

Regardless, the chart shows that the ratio between debt and equity is moving in the right direction. Some of this has clearly been driven by rising prices, though some percentage is a function of de-leveraging mortgage debt.

What we would like to see is the more informative chart showing the ratio of equity to debt for only homes with mortgages. When that line crosses to the upside, it will be a sign of an enormous improvement in the real estate sector.

We are slowly moving in the right direction, but we are not quite there yet.

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