Record US household debt is the key difference between the current downturn in housing prices and previous cycles, says Gabriel Stein, economist at London-based Lombard Street Research.

Such indebtedness means Americans on average cannot service their obligations, even at current low nominal interest rates. But debt levels must return to manageable levels before the US economy can recover, and even once that is accomplished, Stein doubts consumers will be willing or able to splurge on new borrowing and spending. Instead, savings rates will rise to a higher level for the long term.

That means the housing downturn is structural, not cyclical in nature. ôIf developments are structural, it will take much more than a decade for prices to regain their former peak. The US finance sector is likely to shrink substantially, as demand for credit will remain extremely weak for a long time,ö he says, in a report commissioned by Knight Vinke Asset Management.

He is sceptical that efforts by US authorities to stave off financial disaster are effective, noting that so far mortgage rates remain stubbornly high despite the Federal Reserve having slashed interest rates, now to virtually zero.

The shift in direction of the US Troubled Assets Relief Program (Tarp), from buying toxic assets to shoring up bank capital, signals a commitment to improve US banksÆ balance sheets. Expectations that this will simply allow household borrowing to return, albeit at a slower rate of growth, are misplaced, Stein says: ôThis is not simply a question of a year or two of retrenchment.ö

Banks wonÆt be able to extend the same degree of credit, in part because they will no longer be able to use leverage to do so, and in part because they have been partly nationalised. Although subprime lending may continue because of political pressure to support lower-income citizens, many of the tools of the originate-to-distribute model of securitisation, such as teaser mortgages, are off the table.

So how long until the US housing market recovers? The downturn of the late 1970s saw a gap of nearly 16 years before the previous peak in home sales was regained (April 1978 to December 1993), suggesting that we could be in for an equally difficult slog. Stein looks at similar crises in the 1980s and finds housing slumps are becoming more severe. House prices tend to peak later than sales, and, worse, this crisis is the first in 40 years in which not only real house prices deflate, but nominal house prices also have fallen.

While Stein canÆt predict just how long the downturn in the US will last, he reckons housing prices need to fall anywhere from 36% to 49% before they return to the mean, when considering price movements from 1890 to 2007. ôThe impression remains that house prices were still very overvalued at the end of 2007 and remain so in spite of a 10% (real) fall during 2008,ö Stein argues. ôHouse prices have not yet reached their bottom and when they do, it will take a long time for them to recover to pre-bust peaks.ö