The mortgage bubble continued to deflate in the first quarter of this year. On Thursday, the Federal Reserve released its latest Flow of Funds data, which provides a heap of statistics about the status of the U.S. economy. One interesting stat included is mortgage debt held by households. It has been declining since 2008 and has now fallen below 2007 levels.

Here's the chart:

mortgage debt 2011-q1 v2.png

The green line represents the value of $9.97 trillion in the first quarter, and the blue line attempts to show it near, but slightly below, the level in the first quarter of 2007.

The amount of mortgages debt has been declining for two main reasons: some borrowers are paying down their loans and others are defaulting. Since mortgage debt peaked in the first quarter of 2008, it has declined 6.0%.

From this chart you can see how aggressively mortgage debt grew when the bubble began inflating in the mid-1990s. If mortgage growth had followed the historical trend, we'd probably have somewhere around $6 trillion outstanding at this time. Even with the recent decline, we're way above that at nearly $10 trillion.

When you take into account the huge decline of home prices since the bubble burst, this chart looks pretty disturbing. According to the S&P/Case-Shiller National Home Price Index, prices fell to their mid-2002 levels in the first quarter. For mortgages to decline to that level, they'd have to drop another 44% to $5.8 trillion. This begins to show just how little equity -- or even negative equity in many cases -- American homeowners have today.

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