Mortgage Debt Destruction Continues

posted on March 19th, 2011 filed under: Financial Responsibility, Real Estate Market Data

The value of residential real estate is a function of the amount of money private households are willing to borrow from the future to pay for it.  Generally speaking, you want to own a home when the appetite for mortgage debt is expanding, and you want to be fearful when the appetite for mortgage debt is receding.

A fair measure of the appetite for mortgage debt is the total amount of home mortgage debt outstanding.  True to form, this metric has told — indeed foretold — the story of the current real estate implosion.  When the wild expansion of home mortgage debt crested, it was time to sell, especially in the areas where lending had become the most detached from reality.  Real estate in Miami and Coral Gables fit that description, and prices followed the numbers for total debt, heading down.

Federal Reserve Flow of Funds Data -- Home Mortgage Borrowing (to 4Q2010) -- Table(Data reflect percentage change)

Unlike other real estate downturns, the present implosion has seen the appetite for debt not just recede to a lower level but turn negative.  This reflects both a drawdown in new borrowing as interest in home ownership wanes, and the destruction of existing debt as bad loans are written off.  Quite a deadly combination.

Notably, 2010 saw a bigger decline than 2009 overall, with the first half being worse than in 2009, and the second half matching 2009.

Do not expect real estate values to resume their long-term upward trajectory as long as home mortgage debt is being destroyed.

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posted by // This entry was posted on Saturday, March 19th, 2011 at 8:26 am and is filed under Financial Responsibility, Real Estate Market Data. You can follow any responses to this entry through the RSS 2.0 feed.

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