As Deutsche Bank forecasts a 40% drop in New York residential property values and US housing data continues to disappoint, the overall scale of the problem is made clear in one disconcertingly simple graphic from a study from Dhaval Joshi, Chief Strategist at UK hedge fund RAB Capital...
Source: Federal Reserve, Bloomberg
The long term ratio of debt to home prices is around 40%. But the collapse in prices has resulted in a rise of this ratio to over 60% and a near $4Trillion overhang of excess mortgage debt.
There are essentially two ways this gap can be closed. One involves a massive resurgence in home prices. The other requires a major surge in defaults.
In the current environment, which do you think is most likely?
Here is Meredith Whitney, the banking analyst who put her reputation on the line in 2007, called the top for sacred cow Citigroup and tolled the bell for the banks. The main reason for the bearish view was her outlook on housing - and she is now insistent that not only will there be another leg down, but that further price declines will have a serious knock-on impact on the banks and the rest of the economy.