Plummeting house prices outpace mortgage debt decline
House prices nationwide have been declining for three years and are still falling. According to the most recent S&P/Case-Shiller index, house prices declined a record 19.1% in the first quarter of 2009 compared with the first three months of 2008. According to the index, prices in big US cities are back at 2002 levels and still falling.
The national level of mortgage debt is not, however, making a corresponding decline. Mortgage loan modification may be part of the answer to disproportionate mortgage debt levels, but the issue is complex. Although the amount of outstanding mortgage debt declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain disproportionately high.
Injections of liquidity will not ease mortgage debt load
Injecting liquidity into the economy will do little to solve the problem of too much debt. According to government data, home mortgage debt was 73% of gross domestic product last year. That’s the third-highest reading on record. The debt problem can only be solved by paying down mortgages and rebuilding lost savings. How long it might take for Americans to do that is a key question for anyone trying to gauge the prospects for an economic recovery.
Whether or not the United States homeowners ever return to a more normal mortgage debt level (such as the 46% average of the 1990s), it unlikely that the sort of consumer-driven economic rebound that took place after the last few recessions can happen again given the current mortgage-debt level. Saddled with mortgage debt level of 73%, Americans may not easily be driven to spend more.
Increased consumer spending may bring further disaster
The mortgage debt problem goes beyond an inability to boost consumer spending. Not only are borrowers who are overstretched on their mortgages less able to spend money on other things without the help of unsecured loans, they are also more likely to fall behind on housing payments. Increased consumer spending is likely to result in increased mortgage defaults which will mean increased loan write-downs for already troubled banks.
In a recent interview with Bloomberg’s Scott Lanman, Former Federal Reserve Chairman Alan Greenspan indicated that the financial crisis is not over, despite a decline in costs of borrowing. “There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded,” he said. Greenspan also said that “until the price of homes flattens out we still have a very serious potential mortgage crisis.”
