The bursting of the U.S. housing bubble has left homeowners buried under about $4 trillion of excess mortgage debt, according to Dhaval Joshi, the chief strategist at RAB Capital.
The CHART OF THE DAY compares the total amount of home loans outstanding with the value of residential real estate, as compiled by the Federal Reserve, for the past two decades. The latter is adjusted to reflect the average 40 percent debt-to-value ratio that prevailed from 1990 to 2005.
Mortgage balances were $3.64 trillion higher than the adjusted figure as of March 31, as shown in the top panel. The actual ratio, which stood at 62 percent at the end of the first quarter, appears in the bottom panel.
To eliminate the excess and bring down the ratio to its historical norm, either house prices would have to surge or home-loan repayments and defaults would have to accelerate, Joshi said today in an interview.
“In either scenario, it would be a disaster,” the strategist said, adding that prices are unlikely to recover any time soon. The U.S. has 4 million more homes than it needs, by his count. Interest rates will have to stay relatively low for “a prolonged period” to revive the housing market, he said.
Joshi raised what he called the “4 trillion dollar question” in a July 9 report. Barry Ritholtz, the author of “Bailout Nation,” reproduced most of the report in a posting yesterday on his blog, the Big Picture.
(To save a copy of the chart, click here.)