Consumers fall further behind financially, study reports

— -- Americans' household finances are bad and getting worse, and that spells trouble for the economy for the rest of the decade, according to a study by Moody's economy.com.

Consumers are behind schedule in payments or have walked away from nearly $800 billion in household debt of all kinds — mortgages, credit cards, car loans, says Mark Zandi, chief economist for economy.com. "Household credit quality has arguably never been worse," he says.

Zandi is one of the nation's chief analysts of regional economic trends. And Moody's has a long history of credit analysis for municipalities and corporations.

Higher default rates are likely, Zandi says, because:

•The housing downturn. Projected declines in house prices, home sales and housing starts are all worse than the housing collapses of the 1980s and 1990s, Zandi says. He projects a nationwide home price decline of 26% from the peak in 2006.

As prices decline, fewer homeowners can borrow against their home equity. More borrowers also owe more than their homes are worth. More than 8 million homeowners are underwater now, and Moody's forecasts that number will rise to about 12 million in 2009.

Zandi says mortgage defaults won't return to normal levels until 2012 or 2013. "It's going to be a long round trip, and very painful," Zandi says.

•A weakening job market. The unemployment rate has risen to 5.5% from 4.6% 12 months earlier.

•Higher prices. For people in the bottom third of the nation's income distribution, energy costs were about 11% of consumer spending in 2006 when oil averaged about $75 a barrel. Now, with oil around $125 a barrel, "You could argue that nearly half of their disposable income is now going to food and energy," Zandi says.

Higher prices and big debts means that few Americans have the ability to save. "Many have thin financial cushions: little savings, lots of debt," Zandi says.

Mortgage delinquencies are rising, but so are late payments and defaults on credit cards and auto loans. Credit card delinquencies and defaults aren't at record levels, but they're rising rapidly, Zandi says.