Ye can discern the face of the sky

but can ye not discern the signs of the times?

NEW YORK (Reuters) - More than 30 percent of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth, a housing market research company said on Tuesday.

The housing market peaked in most U.S. markets in the last two years. Of home buyers in 2006, 39 percent of those with a median 10 percent down payment now have negative home equity similar to 30 percent of those who purchased in 2007, said online company Zillow in its quarterly home value report.

Of those people who bought their houses in the past 2 years, putting down $20k in hard cash for a $200k home, nearly half own a home worth less than their outstanding balance. I'm going to go out on a limb and bet that pretty close to 100% of those people who got a no-money-down, subprime, NINJA*, liar's ARM loan are today sitting in a house worth significantly less than the "principal" line of their monthly mortgage. That's in addition to the 6% or so haircut they would take if they actually managed to sell it. Those folks are financially hosed. El Presidente's latest magical plan to keep them in their underwater houses for an extra 30 days does nothing but prolong the agony.

Now, it's unfortunate that people find themselves in that situation. One can lay blame all over**, but I really do feel bad for people who bought homes stupidly. Yes it's their fault. Yes they deserve to get hosed, especially if they just intended to flip it to a greater fool. But I don't trip the blind or mock the retarded, either. That said, me feeling bad doesn't change the fact that they are about to learn a lesson. In fact, we all are, because these things have consequences.

A number of states - California being the first one, though Florida, Arizona, and the rest may not be far behind - have a real problem. You see, their main source of income is property taxes, which are proportional to property values. So long as values were going up by double digits every year, all kinds of free money came in, like magic, and state governments were more than happy to let the good times roll. No more, because while the trend has reversed, we are not anywhere near the bottom. It does not get better for them from here. It gets much worse.

The fact that 30% of people who bought houses in the past 2 years owe more than the house is worth means that some proportion of them will walk away; they will turn the house back to a bank that will have no choice but to sell it, driving prices down. Driving prices down puts more people underwater, which means more walking away, which means more fire sales, which means lower property values. Even if it's a small proportion, it's a significant issue because it feeds on itself.

Falling values means lower property tax revenues for governments. It is followed by lower employment in the construction and finance sectors, which means even lower income tax revenues for governments. And that means deficits out the wazoo and budget cuts - think "lower employment in the government sector, too" - at the very time governments want to step in and 'do something.'

With the exception of Uncle Sam***, governments can't spend money they don't have. Nor can they borrow that money at reasonable rates, given that the monoline insurers that used to guarantee their AAA ratings are on the ropes. They have no choice but to pull in their horns and ride the storm out, just like the walker-away from an underwater home. The screams will be heard to high heaven, and tales of woe will be nightly fare on the network news.

There is good news in all this, however****. Consumers are pulling in their horns. They are paying down their debts. As Mish noted a couple of weeks ago, there is a new attitude among consumers that maybe, just maybe, living within our collective means is a good idea after all.

Of course, that attitude itself has economic consequences. Recession, depression, default, deflation - all manner of bad things are going to happen because consumers are starting to take responsibility for their own financial futures. The politicians are going to fight it with every trick in the book, but that won't matter.

The recession, the end of the bubble, the limits to debt were inevitable anyway. But the change in attitude is what will be necessary for us to survive it with the least trouble possible. There still may be a lot of trouble. But if Americans did not occasionally show a propensity to learn faster than the people they elect to 'run' the country*****, it would be a lot worse.

* No Income, No Job or Assets. Honest to God, that's a real acronym.

** It's thicker than manure on an organic farm.

*** Uncle Sam, of course, can borrow and print, and he will, with helicopter drops of money, tax rebates, loan guarantees, bond issues, tax cuts, unemployment insurance. None of it will matter all that much. The signs of the times say that leverage is working backward, the debts are being reneged on. TANSTAAFL.

**** There is always good news if one looks for it, and it usually involves people dicovering that fat, drunk, and stupid is no way to go through life.

***** Yes, I realize that is not logically tenable, but people are not all that logical anyway.