What does this mean for the average American? If you own a house, it is probably worth less than it was a year ago. If you are planning on staying in the home, this isn't a big deal. If you're planning to sell, it may mean that you have much less equity, if any, than you planned. If you're in the market to buy a house, you are negotiating from a position of strength, especially if you are considering a bank-owned property. For others, it means that we can expect the homebuilder industry to be the next in line to ask for a government bailout.

For investors, homebuilder stocks have been hard hit. Schaeffer Research reports that one of the nation's largest builders, Toll Brothers (NYSE: TOL), is currently seeing 13.2% of the company's share sold short. Of course, that means investors are expecting the issue to tumble further from its current price of $17.34. That's already down nearly $11 from its 52 week high of $28 per share. While some may be looking for bargains at this point, the housing market is probably not high on many shopping lists. The report from the National Association of Homebuilders says that most in the industry expect things to get worse for them before they get better.

Furthermore, if big homebuilders were to nose up to the trough of government bailouts, shareholders would likely see their equity substantially diluted if the government decides to help out with cash in exchange for equity as they have done in the financial industry. Of course, it is unlikely that the government would provide any bailout of the builder industry at all. Even the automakers are having a hard time getting a share of the government dole. If Congress does decide to intervene in the housing industry, it will likely move to forestall foreclosures with a plan to renegotiate existing mortgage terms for buyers who bought more house than they could afford or accepted unfavorable financing terms.

Many home buyers may have been over confident in the continued growth of home prices to save them from the consequences of rising rates on adjustable rate mortgages. If their house gained in value, they thought, they could refinance with a higher percentage of equity before the adjustable rate kicked in. Unfortunately, declining values have eroded the existing equity. Lowered equity combined with tighter credit markets made it impossible for many to find alternative financing before the rates jumped on their current mortgages.

Others, who may have looked at their home purchases as investments, have seen their home's value fall to less than the amount they still owe on the property. A not insignificant number of these owners have decided that continued investment doesn't make sense and have walked away from their mortgages. The combination of these factors have sent the foreclosure rate soaring.

Another impact of declining home values is the end of easy home equity loans. For the past few years, homeowners have found rising home values to be a ready source of credit for major purchases such as home improvement projects, entertainment systems and other luxury purchases. This spending has all but dried up during 2008.

While everyone's investment strategy is different, homebuilder stocks have to be viewed with suspicion at this point. They have been distressed and are down substantially, but, for the most part, the continued risk in the industry will outweigh the rewards. Keep an eye on them, though. At some point, a number of these companies will be facing recovering business prospects. When the new housing markets starts to show signs of life, many will revisit this sector for underpriced opportunities.