"Can the US economy really return to “business as usual” when it has 4 million houses surplus to requirement, when 1 out of 4 mortgages are in negative equity, and when by our calculation, it is burdened with $4 trillion of excess mortgage debt, equivalent to 30% of GDP?" Dhaval Joshi
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. 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 – with charts – in a posting yesterday on his blog, the Big Picture.
By David Wilson, July 16, 2010 Bloomberg
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