That the number of loans that are entering

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that the number of loans that are entering delinquency is abating, but the number of loans moving through the foreclosure process is still increasing. Large inventories of unsold homes, which are around 10 months worth of supply, further hamper house price recovery. The homeowner vacancy rate of 2.5% is much above the long-run average of 1.7%. Finally, the expiration of the $8,000 federal tax credit for home purchasers at the end of April 2010 caused sharp drops in construction activity and in builders’ share prices. Faced with these headwinds, the U.S. homeownership rate reverted to 66.9% in the second quarter of 2010, its lowest level since 1999. This means that all the gains made during the housing boom have been negated. In the previous housing bust of the 1990s, it took four years for house prices to recover from the bottom to their previous peak. Given that the 1990 cycle was substantially milder than the current one, we doubt that house prices will return to anywhere near their 2006 peak before 2014. One important factor that hampers recovery is household debt. Including credit card and other debt, households collectively owed more than 114% of GDP, or $16.4 trillion in the first quarter of 2008. That is 30% of GDP, or $9.4 trillion more than just ten years earlier. This indebtedness makes households reluctant to spend, as they are repairing their balance sheets. Figure 5-1 shows the evolution of mortgage debt relative to GDP and relative to housing wealth since 1952. Figure 5-1 illustrates the increasing indebtedness of U.S. households and the erosion in the fraction of housing that they own free and clear. Corresponding to the rise in mortgage
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71 debt, home equity fell from 62% to 35% of aggregate housing wealth from 2005.Q3 to 2009.Q1. Despite a well-publicized uptick in the savings rate, mortgage debt has only fallen by 5% of GDP and overall debt by 6% of GDP. Households still owed $15.8 trillion in debt in the first quarter of 2010, $12.8 trillion of which is mortgage debt. If history is a guide, bringing the debt ratio back to its pre-boom level will take years, perhaps decades. It certainly does not bode well for personal consumption, and hence for GDP growth, in the near term. Figure 5-1: U.S. Mortgage Debt Relative to U.S. GDP and U.S. Housing Wealth Source: Federal Reserve Bank, Flow of Funds, Household sector’s balance sheet Given the state of the housing market, mortgage delinquencies at Freddie and Fannie are expected to rise in 2010 from their record levels in 2009. Mortgage delinquencies for single- family homes were 5.47% (4.99%) at Fannie and 4.13% (3.96%) at Freddie in the first quarter (second quarter) of 2010. As many as 11.3 million homeowners are currently “under water”, and such negative equity position is associated with larger foreclosure rates. As a consequence of the many foreclosures, the GSEs have repossessed a large number of homes: 145,000 in 2009, up from 50,000 in 2007. Nationwide, foreclosure sales represented 29% of all house sales in 2009, up from 6% in 2007. Selling these houses in depressed housing markets, and alongside the
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