The $3,200,000,000,000 Question: Why Housing Has Much More To Drop Before It Bottoms

It is no secret that having failed repeatedly at the trickle down aspect of QE1, QE2, Op Twist 1, Op Twist 2 (and implicitly LTRO 1 and LTRO 2) as it pertains to the man in the street (if not the man in Wall Street, who was subject to 1-2 years of subpar bonuses which have since regained their upward trendline), the last effort the central planners of the world, and the administration, have is to furiously do everything in their power to reflate housing one more time, following what is already a triple dip in home prices ever since the December 2007 start of the Second Great Depression. Which is why month after month we get seasonally fudged, conflicted and outright manipulated data from various sources how housing has bottomed, for real this time, and things are finally looking up. Remember: with any con game, the key word is confidence, and the US consumers need to regain their confidence. Sadly, as the following very simple chart and accompanying explanation, the answer to the housing question is only one: there will be no housing recovery until much more debt is eliminated. $3.2 trillion to be precise. Everything else is merely fits and spurts of upward action predicated by easy money hitting the market either directly, or via the "REO-to-Rental" stimulus program du jour, which lasts for a few months then promptly evaporates.

The chart in question:

And what it means:

The standard wealth effect does not account for the role of credit availability, which can amplify the effect. When home prices are increasing and credit conditions are easy, households can more easily realize the appreciation in wealth. We saw this phenomenon during the boom when easy credit conditions allowed homeowners to use their homes as “ATMs.”


The reverse is true as well; if credit conditions are tight while home prices are falling, households are stuck in their home and are forced to accept the decline in wealth. In addition, once home prices start to turn higher in an environment of tight credit, the ability to realize that appreciation is limited. This is the case today. Home equity lines of credit and cash-out refinancing has been minimal, even for those borrowers who are already in positive equity.


This reflects the slow deleveraging process. Housing assets plunged 29% from the peak in mid-2006, but mortgage debt only edged down 8% from its peak in mid-2008. This has left the aggregate loan-to-value ratio at 60%. Prior to the crisis, the loan-to-value ratio averaged 40% (Chart 2). To restore a normal loan-to-value at the current level of housing wealth, households would need to pay down their mortgage debt by US$3.2tn.

That's $3,200,000,000,000 in excess debt before true price clearing can commence. That's also more in debt than QE1 and QE2 combined have monetized so far.

Good luck.