This situation has its' basis in tax law changes made in the 80's allowing second mtges to be deductible instead of other interest. This encouraged use of leverage, which is fine if used with discretion. The borrowing simply transferred to collateralized loans with homes as the collateral. The use of tax codes to modify behavior has unintended consequences.

Additionally, lending standards collapsed as time passed and lenders wanted to continue to ignore the normal cyclical behavior of the economy. If demand tailed off---just invent loan products that encouraged coming to the window.

Now we have reached the end game phase and the market will have to realign based on current realities.

The underwater borrowers should walk away soon before the Mortgage and Debt Forgiveness Act expires. Since it takes 12 months or more to finish the process, delaying the inevitable will put you on the hook for income taxes that need to be paid when the lender issues that 1099. Many people don't realize the tax implications of this.

Bob you raise very good points.

The vintage of those changes means that very few younger than their mid 50's today had experience of deducting an auto loan.

A secondary effect of those loose lending standards (as was true with homes) led to an ever increasing escalation of auto prices. When the shift was made to leasing it only got worse because no one really cared about the price... just the monthly payment.

No doubt that those who are underwater should walk, and rent for much less cost.

I bought in the bubble so the only reason my mortgage is not underwater is that I went against the conventional wisdom of just about all realtors and financial advisors and made a hefty downpayment using the (bubble-inspired) equity of my previous home. Hence, can handle the payments, but had to forgo the humongous SUV and houseful of new furniture.

I also noticed unreasonable increase in auto prices in the last decade. No spectacular new tchnologies that would justify it, just old stuff - no surprise, the cars had been around for long. But how the car makers always manage to be acutely short of money, is beyond my comprehension.

Car prices have gone up because of inflation and a weaker dollar. It becomes more expensive to produce the cars as prices go up. The price increases are passed on to the consumer. As far as being short on money, that has more to do with the UAW labor union's high wages. Even if production is cut, the Big 4 still had to pay their employees even if they weren't needed. They would be sent to an empty room and sit there for 8 hours while receiving their entire paycheck. The UAW recently realized they were bankrupting the automakers and re-negotiated their labor agreement. Toyota and Honda do not hire employees from a labor union and that allowed them to pay lower wages while earning higher profits.

when you sell a home the buyers pretend as if they are buying a new home. They will inspect every nook and cranny and demand an adjustment in price far higher than what it would cost to the homeowner to fix the problem.
It pays to paint and improve the look of your house. If you start fixing everything you will go mad.