WSJ: 1 in 6 homeowners upside down, and growing

The Wall Street Journal paints a grim picture of the housing market today in its analysis of debt-to-equity ratios in the residential market.  The rate of homeowners who owe more than their equity has increased to 16% after a 30% decline in housing values.  That’s almost three times the rate in 2007 and four times the rate in 2006, and it’s likely to keep going higher:

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.”

Among people who bought within the past five years, it’s worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.

The majority of homeowners still have equity, and even among those who don’t, many continue to make their mortgage payments on time. The financial-bailout legislation could at least “keep things from getting much worse” by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.

The problem is more regional than national, at least at the extremes.  Texas and North Carolina are experiencing a slight increase in home values, at least at the moment.  The hardest-hit areas are Florida, Los Angeles, Las Vegas, and San Diego.  Percentages of under-water homeowners who bought in the last 5 years go over 50% in San Diego and Las Vegas, and above 40% in Miami and Phoenix.

What will this mean?  The WSJ warns that a consumer-spending freeze is coming that will slam the economy.  Right now, lenders aren’t interested in selling car loans or credit on other big-ticket items, and people aren’t likely to buy them anyway.  The decline in sales will result in plenty of lost jobs, which will in turn hit the residential housing market all over again.  Ad sales will drop as consumer spending declines, meaning that many who rely on that for revenue will find themselves gasping for resources.  And of course, as foreclosures mount, they will deepen the decline on home values.

On a brighter note, the decline has brought home prices much closer to their historical relationship to income.  As that point approaches, housing prices should hit bottom and start rebounding, assuming that a massive load of foreclosures doesn’t create its own revaluation.

In looking at the WSJ’s map, in fact, the problem appears mostly concentrated in Florida and California, with hot spots in Green Bay, up the West Coast, and to a less intense extent on the northern East Coast.  What does that mean politically?  Does it mean that the fallout from the housing bubble can be quarantined to these regions?  Interesting questions, with no real answers at the moment.