Wednesday, October 08, 2008

Under Water

And here's the problem.

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

This situation is being compounded by credit issues and the negative neighborhood effects of foreclosures, but it's also a problem because not enough people make enough money to reasonably afford houses at the levels we saw at the peak of the boom. It's possible improving credit conditions and moving more people into sensible mortgage terms (30 year fixed at not insane rate) will improve this situation somewhat, but only back to pre-bubble levels/trends.