Mortgage Debt in the U.S. Continues to Contract

The ongoing turmoil still gripping housing markets across the country has manifested itself in the ""Federal Reserve's"":http://www.federalreserve.gov macro assessment of household wealth and capital flow.
[IMAGE] With foreclosure stripping millions of Americans of their largest asset and potential homebuyers still watching for the market bottom, the total sum of home mortgage debt in the U.S. has dropped to its lowest level in nearly five years.

Outstanding mortgage debt contracted by 1.8 percent over the third-quarter period to $9.88 trillion, according to the Fed's 'Flow of Funds' report.

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Gregory Daco, principal U.S. economist for ""IHS Global Insight"":http://www.ihsglobalinsight.com, says “deleveraging is still very much ongoing especially on the housing front with price declines keeping many potential buyers and sellers on the sidelines.”

This deleveraging has cut the ratio of mortgage debt to disposable income to 85 percent. That’s from 100 percent in late 2007.

The Fed’s latest report shows household net worth also took a big hit during the third quarter.

The value of real estate assets actually rose $102 billion, but volatility in the stock markets depreciated financial assets by $2.66 trillion.

All in all, household net worth in the U.S. lost $2.44 trillion over the July-to-September period.

Daco says the third-quarter net worth decline is the largest since Lehman Brothers' collapse in September 2008.

IHS Global Insight expects household wealth to rebound by just under $2.0 trillion in the last quarter of 2011 as stock markets have recouped most of their losses since their late-September trough.