Investors may have hoped that falling home prices and the mortgage-backed paper that goes with them would be the only big shoe to drop at US financial firms. They should only be so lucky.

Credit cards are likely to be the next Waterloo for the banking system. According to The Wall Street Journal, "A broader range of consumers now carry cards and many run consistent credit balances to fund their lifestyles. This has led to successively higher peaks over the years in credit-card charge-off rates."

It is worth pausing for a moment to think about that. Banks are being recapitalized by the Treasury. There is some hope that earnings at big financial firms will begin to recover by the middle of next year as the housing market becomes more stable. How could future losses at banks rival those seen in the last three quarters?

The fact is that many consumers are having trouble paying for their homes and relatively expensive gas at the same time. The average citizen has gone wild buying plasma TVs and video game consoles for the kids. Most of that is on the plastic sitting in the pockets of those who are already stretched too thin.

Until recently, a home equity line was the easy way to get some cash to pay down those card balances. Housing prices have cut that off.

How much is a stake.? No one knows? But, what if 100 million working Americans have $2,000 each on their plastic? That number is too big to calculate because most calculators do not have than many zeros. Some of it is not going to be paid back.

Douglas A. McIntyre is an editor at 247wallst.com.

Americans net worth declined by $1.7 trillion in Q1 2008 - - the biggest drop in wealth since 2002 - - as declining home prices and a sluggish stock market took a toll on portfolios and asset holdings, CNNMoney.com reported Friday.

U.S. household net worth fell 3% to $56 trillion at the end of March, according to the U.S. Federal Reserve's flow of funds report, CNNMoney.com reported, with the amount of home equity declining to 46.2% - - the lowest on record.

Economist Peter Dawson told BloggingStocks Friday the net worth and home equity statistics aren't surprising, given the U.S. economy's current fundamentals. Further, he said the economy is now approaching "the danger level" regarding several key economic metrics.

Trends moving in wrong direction

"The two biggest concerns for the economy right now are a lack of job growth across the spectrum and stagnant wages for segments of the American workforce. A lack of job growth and wage increases will put the U.S. economy in a very serious state, and not just with home values, if the current trends do not reverse," Dawson said.
Moreover, Dawson said he's less concerned about home equity and overall home values, because "a home is a derivative asset, really a function of job growth, wage gains, and rising real incomes."

"The key remains job growth, and the ability of all employees to secure the wage gains that are essential to a growing economy. Some have argued that the U.S. economy could compensate for a lack of consumption at home by simply selling more goods to consumers abroad, but this is a deeply flawed model," Dawson said. "Absent consumption at home, the U.S. economy will fall into a prolonged recession, and the key to consumption is job growth and wage increases. Without job growth and wage increases the United States will simply run out of consumers. You'll be a condition where there are plenty of goods in the stores but there will not be nearly enough consumers to buy them. That's a place the nation doesn't want to be in."

It was fun while it lasted. All that extra money from your home equity that helped you finance your new car or the his and her flat-screen TVs.

The party may be over. The American Bankers Association yesterday released its quarterly survey of consumer loans, and noted that late payments on home equity loans rose to 2.15% in the first quarter. That's up quite a tick from 1.92% in the final quarter of last year.

Payments are considered delinquent if they are 30 or more days past late.

"There are still signs of consumer financial distress, which will continue throughout most of this year as the worst of the housing problem works its way through the economy," said James Chessen, the association's chief economist, in a press release. Still?

The ABA's survey is based on information supplied by more than 300 banks nationwide. Delinquencies on a bevy of other consumer loans are also growing, including those for auto, boats and home improvement, according to the survey. These loans increased 2.42% in the first quarter. That's up from the fourth quarter's 2.23% delinquency rate, and the highest since the second quarter of 2001, when, if you remember, we were in a recession.

Strangely, this same survey suggests that credit-card payment delinquencies are down. I don't know what to make of that one. But it's definitely just one more cloud on the horizon.

This post is written as part of AOL Money & Finance's Best & Worst of 2006. Vote for it as the Money Story of the Year or check out the other nominees in the category.

The softening real estate market reminds me of the difference between a recession and a depression. If your neighbor loses a job, it's a recession; if you lose your job, it's a depression. Regarding real estate, if your neighbor's house goes into foreclosure it's a real estate recession; if your house goes into foreclosure it's a real estate depression.

Last week I saw strange people hanging out in front of the house across the street from mine. One of them told me he was an auctioneer; another said she was a real estate agent and the house was in foreclosure. Since we are not in danger of foreclosing on our house, by my previous definition, we are in a real estate recession.

The softening real estate market is a money story of the year because it's slowing down the economy. A leading home builder said we were in the worst housing market in 40 years. In October home prices fell nationally at a 3.5% annual rate -- the biggest year-over-year price decline on record. And homeowners used their homes as a source of cash -- withdrawing $800 billion in home equity in 2005. Therefore, a reversal in home prices could boost foreclosures, reduce consumer spending, and crimp consumer confidence. Moreover, every dollar spent on buying a new house is worth another $7 to $8 to the overall economy, from spatulas to fertilizer. So a decline in home building could lead to job losses in construction and its related industries.

I view the softening real estate market as a real estate recession -- if I can keep paying my mortgage, perhaps it won't become a depression. Regardless, it looks like things will be getting worse before they get better. I lived through a real estate slump in the late 1980s -- during which time my house lost about 15% of its value. This slump looks a lot worse to me.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College.