The U.S. housing market contains a nearly $4 trillion negative equity hole, according to William Emmons, an economist with the Federal Reserve Bank of St. Louis.

Emmons made that statement while speaking at HousingWire’s 2012 REthink Symposium.

The Fed Bank economist said it would take $3.7 trillion, much more than the $25 billion mortgage servicing settlement and other federal housing initiatives, to get homeowners with mortgage debt back to preferred loan-to-value ratio levels.

Emmons’ data estimates the average LTV for those with mortgage debt is currently 94.3%.

That compares to preferred LTV levels among mortgage debt holders of 58.4%, which was the average struck among mortgaged homeowners in the period stretching from 1970 to 2005. Emmons told the crowd there is no easy way to fill that gap, and the deep hole is hardly discussed among the media and policymakers.

“We are sort of stuck in this,” he told the crowd. “It’s a sweat box we’re in, and we can’t get out. We are not talking about this very much … it’s just too ugly.”

He added, “It is like the debt that is outstanding is crushing the equity that is there.”

Emmons said the only viable option to narrow the gap is letting home prices fall until they eventually reach levels that entice buyers, bringing private capital back in. A home-price boom or a government bailout would help, of course, but both those scenarios are unlikely.

At this point, home price appreciation would need to rise 62% to narrow the gap to the ideal LTV level, Emmons said. Significant government intervention also is unlikely given the fact it would take a $3.7 trillion bailout, or 24% of GDP, to narrow the gap, according to Emmons’ data.

He says that amount makes other federal initiatives launched to band-aid the housing market so far look like “peanuts” in comparison.

With that in mind, the only alternative is that we have “millions of weak homeowners exit, replaced by new private owners with equity to recapitalize the housing sector.”

Emmons said that option will still be painful since he believes another reduction in home prices is needed to attract new buyers.

“The asset class is not priced attractively yet,” Emmons said. “You need to get the value down to where it looks like a screaming buy.”

Emmons in his report said with the assumption that another 20% decline in national home prices is required to bring in new buyers, the amount of mortgage debt that must be eliminated then is $4.97 trillion, or 50% of current face value.

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