Feb. 13 (Bloomberg) -- When Mary Kamanu paid $409,000 for a house in Folsom, California, she never imagined that three years later it would be worth about 20 percent less and she would have to pay the bank more than $80,000 just to sell the place.

``I'm completely upside-down on my mortgage, like a lot of people,'' said Kamanu, who wants to move 12 miles away to live with her fiancé in a suburb of Sacramento. ``I know I'm going to have to come up with a big chunk of change.''

By the end of this year as many as 15 million U.S. households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc. That may fuel an increase in foreclosures, erode prices, and increase mortgage bond losses, he said in a Feb. 1 report.

``If borrowers who are underwater go into foreclosure, the properties are likely to be sold at discount prices and will further depress the price of housing,'' said Robert Engle, a Nobel laureate in economics who teaches at New York University's Stern School of Business in Manhattan. ``It becomes a spiral.''

Thirty-nine percent of people who purchased a home two years ago already owe more than they can sell it for, according to a Feb. 12 report from Zillow.com, a real estate data service. Only 3.2 percent who bought five years ago are in that situation, the report said.

Prices Fall

Almost half of the borrowers who took out subprime mortgages in the last two years won't have any equity left if home prices drop an additional 10 percent, New York-based UBS AG analysts led by Laurie Goodman wrote in a report yesterday.

Home prices probably will decline 4.5 percent this year and 2.6 percent next year after falling 2.2 percent in 2007, according to Fannie Mae, the world's largest mortgage buyer. New foreclosures averaged about 2,900 a day in the fourth quarter, double the pace of a year earlier, according to RealtyTrac Inc., an Irvine, California-based real estate data company.

Cities in California, Ohio, Florida and Michigan accounted for three-quarters of the 20 U.S. metropolitan areas with the most foreclosures in 2007, RealtyTrac said in a report today.

``If people owe more on their mortgage than their house is worth, a substantial number of them will give their keys back,'' said Kenneth Rosen, head of the University of California's Fisher Center for Real Estate and Urban Economics.

No Options

Refinancing won't be an option for homeowners with negative equity who have mortgage rates that are spiking, he said. About a third of U.S. borrowers have adjustable-rate home loans, according to the Federal Housing Finance Board in Washington.

``They will lack refinancing ability, and will obviously be under financial strain as their rates adjust,'' Rosen said. ``We're going to see credit card delinquencies rise and car loan delinquencies rise as a result.''

As many as 5 million U.S. homeowners may have mortgages that exceed the value of their homes by the end of this year, according to estimates from Rosen. He said he expects a 16 percent decline in home prices from 2006 to 2009, compared with Hatzius' estimate of a 22 percent drop.

Falling prices and rising foreclosures are a threat to an already slowing economy since many homeowners used their equity to finance purchases such as cars or computers.

Sunset Wedding

U.S. property owners took out about $318 billion of equity from their homes in 2006 by refinancing home loans, according to Freddie Mac, the world's second-largest mortgage buying company. Add to that $146.2 billion lent in home equity lines of credit, according to the Federal Reserve.

In all, $2.2 trillion of home equity has been liquidated since 2001, which was the first of five years of record-setting house prices and sales.

Kamanu refinanced her house in May 2007 and owes $415,000 on her mortgage. Homes in her neighborhood now sell for about $330,000, she said. The median home price in California dropped 17 percent from a year earlier in December, according to the state's association of Realtors.

Kamanu said she doesn't want to put her life on hold until the housing market improves. She's planning a sunset wedding later this year on the beach at Folsom Lake, about half a mile from her property, even as she waits for a buyer.

Relying on Luck

She said she's willing to sell the three-bedroom, two-bath, 1,272-square foot house fully furnished and include two wide- screen televisions to entice a buyer. The home has a fireplace and a two-car garage.

``I'm hearing it might be a year or two before the housing market comes back, and I can't wait that long,'' said Kamanu, 38. ``I'm relying on luck, hoping that someone will come along and fall in love with the house, like I did.''

Real estate assets represent about one-third of the net worth of U.S. households, said Michael Darda, chief economist of MKM Partners in Greenwich, Connecticut. In 2006, Americans owned $20.5 trillion in homes, compared with $6.3 trillion in corporate equities, according to Federal Reserve data.

``The decline in home prices will cause a ding in household balance sheets,'' said Darda.

Declining values may keep many people from trading up. Owners with fixed-rate mortgages probably will ride out the slump without moving, even if they have a growing family and need more room, said David Berson, chief economist at PMI Group Inc. in Walnut Creek, California. They won't be spending much for clothes or dishwashers or Disneyland vacations, he said.

Values in `Freefall'

``Economists call it a negative wealth effect,'' said Berson, the former chief economist of Fannie Mae. ``When housing values go down, people tend to stay put, save more and spend less.''

The economy probably will shrink 0.5 percent in the current quarter and 1 percent more in the second quarter as the real estate decline takes its toll, said Hatzius. An economic recession began in late 2007 and will last until at least July, he forecasts.

``All aspects of residential real estate remain in freefall,'' said Hatzius. ``At present, there is no sign of a bottom.''

Ricardo Fornos is part of that plunge. He's trying to sell his two-bedroom, two-bath condominium in Davie, Florida, near the Miami Dolphin football team's practice field at Nova Southeastern University. Fornos paid $190,000 two years ago and now expects he may get $165,000 for it.

With a mortgage of $171,000, Fornos said he may have to pay as much as $20,000 to sell the property after covering the broker's fee and the buyer's closing costs.

Fornos, 50, is eager to get out now before prices worsen. In December, the median price for a condominium declined 8 percent from a year ago and sales dropped 31 percent, the Florida Association of Realtors said.

``It comes to the point where you have to decide: Do I want to take a big loss now or an even bigger loss later?'' he said.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net

Last Updated: February 13, 2008 13:30 EST