Hopes of a recovery in consumer spending seem unrealistic to me. People who owe more than their houses are worth aren't going to be eager to do big spending.

• Home values: Home values fell 12.1 percent year-over-year in Q2 to a Zillow Home Value Index of $186,500, resulting in a total 22.3 percent drop in value since the market peaked in mid-2006. Although this marked the 10th consecutive quarter of decline in the Index, it was the first time during that period that the rate of year-over-year decline was smaller. The Zillow Home Value Index measures the value of all homes, not just those that sold in a particular period.
• Foreclosure re-sales: More than one-fifth (22 percent) of all transactions in June were foreclosure re-sales (REO sales) compared to 10.5 percent one year ago. Merced, Cailf. had the highest rate in the country (77.4 percent), closely followed by Stockton, Modesto, Vallejo and Las Vegas.
• Negative equity: 23 percent of all owners of single-family homes with mortgages were underwater at the end of Q2.
• Home sales: Total number of home sales in June was down 23.7 percent compared to the same time period one year ago.

Another source puts the percentage of mortgages under water at an even higher 32.2%.

More than 15.2 million U.S. mortgages, or 32.2 percent of all mortgaged properties, were in negative equity position as of June 30, 2009 according to newly released data from First American CoreLogic. As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity. Negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide.

What I want to know: How many banks will fail because of these numbers?

The Mortgage Bankers Association says 9.24% of all loans are delinquent. Since the MBA expects foreclosures to peak at the end of 2010 (yes, we are over a year from the peak) and since it takes more months for those houses to go on the market we are looking at a big supply of housing on the market in 2011. Keep that in mind before buying.

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

These numbers will grow worse as more people with negative equity decide to walk away from their mortgages.

In Florida 12% of mortgages are in the foreclosure process and over 10% more are delinquent. You can buy a house cheap in Florida. But just wait and you can get one even cheaper.

Check out advice Mish Shedlock gives to someone thinking about walking away from an underwater mortgage in Arizona.

The bright side is home prices are likely to keep falling for a couple more years at least, then do nothing much of anything for another 5-10 years. That means if you walk away and suffer the credit rating penalty now, it may not matter by the time you are ready to buy another house 3-5 years from now. Moreover, you would then have a clean slate on credit, and hopefully a saved up down payment as well.

However, if you try and wait this out, yet fail by going bankrupt in say two years, you will have made matters that much worse in terms of opportunity cost in improving your credit, and in saving up money for a down payment, while worrying every step of the way about the axe that will fall.

In a nutshell: a bad credit rating due to a foreclosure now won't matter for 5 years since you shouldn't buy a house for 5 years anyway.