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Negative Equity in Housing Nears $4 Trillion

Negative equity gap nears $4 trillion
 
The U.S. housing market contains a nearly $4 trillion-dollar
negative equity hole, according to Williams Emmons, an economist
with the Federal Reserve Bank of St. Louis.  Emmons made that
statement while speaking at Housing Wire's 2012 REthink
Symposium.  The Fed Bank economist said it would take $3.7
trillion, much more than the $25 billion mortgage servicing
settlement and other federal housing initiatives, to get
homeowners with mortgage debt back to preferred loan-to-value
ratio levels.
 
Emmons' data estimates the average LTV for those with mortgage
debt is currently 94.3%.  That compares to preferred LTV levels
among mortgage debt holders of 58.4%, which was the average
struck among mortgaged homeowners in the period stretching from
1970 to 2005. Emmons told the crowd there is no easy way to fill
that gap, and the deep hole is hardly discussed among the media
and policymakers.  "We are sort of stuck in this," he told the
crowd. "It's a sweat box we're in, and we can't get out. We are
not talking about this very much … it's just too ugly."  He
added, "It is like the debt that is outstanding is crushing the
equity that is there."
 
Emmons said the only viable option to narrow the gap is letting
home prices fall until they eventually reach levels that entice
buyers, bringing private capital back in. A home-price boom or a
government bailout would help, of course, but both those
scenarios are unlikely.  At this point, home price appreciation
would need to rise 62% to narrow the gap to the ideal LTV level,
Emmons said. Significant government intervention also is unlikely
given the fact it would take a $3.7 trillion bailout, or 24% of
GDP, to narrow the gap, according to Emmons' data.  He says that
amount makes other federal initiatives launched to band-aid the
housing market so far look like "peanuts" in comparison.  With
that in mind, the only alternative is that we have "millions of
weak homeowners exit, replaced by new private owners with equity
to recapitalize the housing sector."  Emmons said that option
will still be painful since he believes another reduction in home
prices is needed to attract new buyers.  "The asset class is not
priced attractively yet," Emmons said. "You need to get the value
down to where it looks like a screaming buy."  Emmons in his
report said with the assumption that another 20% decline in
national home prices is required to bring in new buyers, the
amount of mortgage debt that must be eliminated then is $4.97
trillion, or 50% of current face value.
Ciara Brennan
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