CEPR - Center for Economic and Policy Research

Ratio of Mortgage Debt to Housing Value Hits New Record

June 7, 2007 (Housing Byte)

Ratio of Mortgage Debt to Housing Value Hits New Record

Housing Byte by Dean Baker

For Immediate Release: June 7, 2007

Contact: Alan Barber, 202-293-5380 x115

The ratio equity to home value will fall below 50 percent before the end of next year.  

The quarterly Flow of Funds data from the Federal Reserve Board show that homeowners are still taking on mortgage debt at a healthy pace even as their homes have largely stopped appreciating in value. Homeowners increased their mortgage debt at a 5.4 percent annual rate in the first quarter, adding debt at an annual rate of $510 billion. This is rate of borrowing is down from the 9.3 percent growth rate in 2006, but it is considerably more rapid than the 2.0 percent rate of house appreciation reported for the first quarter.

As a result, the ratio of equity to home value continued to fall. At the end of the first quarter of 2007, the ratio of equity to home value stood at 52.7 percent, another record low. This ratio stood at 54.3 percent at the end of 2005. It had been at 57.9 percent as recently as 2000, and was close to 70 percent until the nineties. This drop in the ratio of equity to value is especially disconcerting given the country's demographics. With much of the baby boom cohort at the edge of retirement, it would be expected that the ratio of equity to value would be near record highs.

There is reason to believe that the ratio of equity to value will continue to decline for the foreseeable future. The inventory of unsold new and existing homes both stand at record highs. The 4,200,000 stock of unsold existing homes is more than a year's supply at the pre-bubble sales rates of the mid-nineties. Furthermore, the surge in foreclosures ensures that a large additional supply will be entering the market well into 2008. This will put substantial downward pressure on prices, which are already falling in many areas. With slowing productivity growth and rising material prices putting upward pressure on inflation, mortgage rates are also moving higher, which is yet another negative for the housing market.