By Dirk van Dijk of

NEW YORK ( TheStreet) -- One of the central reasons for the recession -- and for the anemic recovery from it so far -- has been the issue of the popping housing bubble.

Housing is, for most homeowners, a highly leveraged investment. Even the old conservative rule of a 20% down payment is a far more leveraged position than is allowed when buying stocks, where at least 50% down is required. During the housing bubble, almost no one was putting 20% down anymore, and down payments of under 5% were common.

Even long-time owners were encouraged by the banks to treat their houses as if there was an ATM in the kitchen next to the toaster oven. Cash-out refinancing and homeowners lines of credit were common. In fact, even during the huge run-up in housing prices, the percentage of equity people had in their houses did not rise significantly on average nationwide. People assumed that housing prices would never fall and so it was safe to spend the equity gains that occurred as housing prices rose.

Then, as prices fell, the equity in houses fell even more sharply as a result, wiping out trillions of dollars of wealth. It also resulted in huge numbers of people being "underwater" on their mortgages, owing more than the house is worth.

Being underwater is a necessary condition for a foreclosure to happen. If the homeowner has positive equity in a house, he will always be better off simply selling the house rather than let it slip into foreclosure. It is, of course, not a sufficient condition.

There are lots of people who are underwater on their houses who are still paying the mortgage. The depth of the water matters. There are also non-economic factors to consider -- for most people a house is a home, and they have strong attachments to it and the community it is in. People don't want to have to uproot their families and pull kids out of the schools they are going to.

Letting a house go into foreclosure is not exactly good for your credit rating, either. Thus if a homeowner still has solid cash flow and is only a little bit underwater, the odds are that he or she will keep on paying the mortgage. However, if one or both of the breadwinners in the family become unemployed, the odds of the house going into foreclosure rise significantly.

Still an Enormous Problem

Over the weekend I saw some graphs that were part of a Congressional briefing on the subject by Mark Zandi of Moody's Economics and Robert Schiller, the Yale professor and the co-creator of the Case-Schiller housing price index. The graphs show that while the situation has stabilized recently, we still have an enormous problem on our hands.

The recent small uptick in housing prices is mostly due to the homebuyer tax credit. By arresting the decline of housing prices, the tax credit did prevent more homeowners from slipping below the waves.

Of course, after someone actually loses the house to foreclosure, or if he or she can arrange a short sale where the bank agrees to let the homeowner sell the house for less than the amount of the mortgage and not have to show up at closing with a big check, the house is no longer underwater.

The first graph (all the graphs are from this site ) shows the percentage of homes with mortgages that are underwater (solid blue line, left scale). It doesn't matter if the house with the $250,000 mortgage is worth $249,000 or $49,000, as long as it is worth less than the amount of the mortgage it is included.

At one time, it was common for people to have mortgage-burning parties where people celebrated the last payment to the bank on the house. That has not died out, and about one third of houses in the country actually have no mortgage on them at all.

Some of those are all-cash investors, but mostly it is older people who have lived in the house for a long time and finally paid it off. Thus the percentage of homes in the country that are underwater is significantly less, just under 20% rather than over 30%, as is shown by the dashed blue line.

The red line shows the total value of the underwater mortgages to be about $2.4 trillion, down from a peak of about $2.6 trillion in the second quarter of 2009, but up from under $500 billion in 2006. Of course, there have been a lot of foreclosures over the past few years, and homes that have already been foreclosed on are not under water.

The $2.4 trillion number is the total amount of the mortgage, not the amount that is underwater. It is the underwater portion that is the potential loss to the big banks that made the mortgages, like Bank of America ( BACl) - Analyst Report ) and JPM ( JPM) - Analyst Report ). However, mostly the risk is to the taxpayer, since the biggest holders of mortgages are Fannie Mae and Freddie Mac and more recently, the Fed.

The underwater portion is estimated to be $771 billion as of the first quarter of 2010. People just a little bit under are not that likely to let the house go back to the bank. It simply is not worth it in terms of family disruptions, credit ratings and the personal sense of honor in paying your debts even if you are not legally obligated to do so (most mortgages are non-recourse, meaning if you don't pay, you lose the house, but that's as far as your legal obligations go). People who are deeply under are downright stupid if they don't.

The second graph shows the breakdown. There are a total of 14.75 million homeowners who are underwater. Of those, over 4 million are sitting deeper than the wreck of Transocean's ( RIGl) - Analyst Report ) Deepwater Horizon. That big first bar is homeowners with more than 50% negative equity.

In other words, for that $250,000 mortgage, the house is worth less than $125,000...OUCH! With the end of the tax credit, it is highly likely that we will see a renewed decline in existing home prices.

So where is the flood? The worst "flooding" by far is in the desert of Nevada. It is a pretty good bet that the 18% of homeowners there that are more than 50% underwater will go into foreclosure.

The other two poster children for the housing bubble -- Florida and Arizona -- are not in quite as bad shape; to get to half of all homeowners underwater, you need to include even those that are just "damp" on their mortgages. Still, that is a lot of people who are underwater.

The future course of housing prices -- and with it the savings rate -- and consumer spending are a far bigger source of uncertainty than anything surrounding future regulations or taxes. If businesses don't think the consumer demand will be there, they are not going to invest, particularly at a time when there is lots of excess capacity, as there is now.

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