Underwater The Fish Don't Stink

...but the mortgages do, and people are starting to simply walk away from them at a much higher rate.

In California's Inland Empire east of Los Angeles, where Barnard lives and sells real estate, median home values have plunged more than 40 percent in the last year as formerly sidelined buyers snapped up foreclosed properties.

Those bank-owned homes moved at fire-sale prices that decimated the value of neighboring homes -- many of which are owned by people who have limited "skin in the game" because they put little or no money down at purchase.

Deflating home prices thus threaten to accelerate a negative feedback loop that has sent prices lower, said economist Ed Leamer, director of the UCLA Anderson Forecast.

"Should the downward spiral in home prices, neighborhood condition and equity deterioration continue, more and more mainstream borrowers are likely to walk away from their homes," Credit Suisse said in a December report.

Barnard, who already has stopped making payments on five investment properties purchased in 2005, is on the verge of giving up on his own home that is now worth roughly half its $800,000 purchase price.

Others weigh the predictable and relatively short-term foreclosure-related hit to their credit ratings against the diminishing likelihood of breaking even on their investments or even making monthly payments on such severely "underwater" homes.

The death spiral is accelerating, and unless Obama's foreclosure relief plan makes a real dent in home prices, it's just going to be too much downward pressure to keep the housing market stabilized.

The more people who choose to abandon their homes, the lower the surrounding homes will go in value, putting more homeowners underwater, causing more of them to walk away...the vicious cycle is pretty well set now.

Pray this works. If it doesn't, next stop is Hooverville. We're in the Great Recession. We're playing for avoiding a Depression here. I'm not convinced it'll work.