St. Louis Federal Reserve Bank President James Bullard gave a speech today on the US housing market, and made a few remarks following the speech regarding gasoline prices. First, some of the points from his speech on housing:
- According to estimates by my staff, there are about 75.3 million homeowners in the U.S. as of the third quarter of 2011. About two-thirds of these, 49.4 million, had some mortgage debt outstanding on the house. These households collectively had $712 billion of equity to support $9,882 billion of mortgage debt as of the third quarter of 2011.
- The LTV (loan-to-value of a mortgage loan) averaged 58.4 percent between 1970 and 2005, but shot up to 90 percent during the crisis and has remained there. This picture makes it particularly clear that homeowners were borrowing during the bubble phase not expecting house prices to fall appreciably. If we think of the 58.4 percent LTV as being the desired steady state, homeowners would have to pay down mortgage debt collectively by $3,695 billion, about one-quarter of one year’s GDP.
- The desired physical housing stock is lower than the actual stock, … and likely by a substantial margin. Taken literally, this means that households would like to reduce square footage and remove amenities in exchange for lower levels of debt. The only realistic way for that to happen is to allow the natural depreciation in the housing capital stock to catch up with household desires.
According to MarketWatch, Bullard noted that consumers have adjusted to gasoline prices of $4/gallon over the past couple of years, but “$5 would be a different story.” See our story on the eight forces pushing gasoline toward that $5/gallon level.
The full text of Bullard’s speech is here.
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