MOUNTAIN HOUSE, Calif. — This town, 59 feet above sea level, is the most underwater community in America.
 
One homeowner bought a foreclosed property on Prosperity Street in Mountain House, Calif.
 
This week, a real estate office in Tracy, Calif., near Mountain House, was advertising foreclosure sales.

Because of plunging home values, almost 90 percent of homeowners here owe more on their mortgages than their houses are worth, according to figures released Monday. That is the highest percentage in the country. The average homeowner in Mountain House is “underwater,” as it is known, by $122,000.

A visit to the area over the last couple of days shows how the nationwide housing crisis is contributing to a broad slowdown of the American economy, as families who feel burdened by high mortgages are pulling back on their spending.

Jerry Martinez, a general contractor, and his wife, Marcie, an accounts clerk, are among the struggling owners in Mountain House. Burdened with credit card debt and a house losing value by the day, they are learning the necessity of self-denial for themselves and their three children.

No more family bowling night. No more dinners at Chili’s or Applebee’s. No more going to the movies.

“We make decent money, but it takes a tremendous amount to pay the mortgage,” Mr. Martinez, 33, said.

First American CoreLogic, a real estate data company, has calculated that 7.6 million properties in the country were underwater as of Sept. 30, while another 2.1 million were in striking distance. That is nearly a quarter of all homes with mortgages. The 20 hardest-hit ZIP codes are all in four states: California, Florida, Nevada and Arizona.

“Most people pay very little attention to what their equity stake is if they can make the mortgage,” said First American’s chief economist, Mark Fleming. “They think it’s a bummer if the value has gone down, but they are rooted in their house.”

And yet the magnitude of the current declines has little precedent. “When my house is valued at 50 percent less than it was, does this begin to challenge the way I’m going to behave?” he said.

Mountain House, a planned community set among the fields and pastures of the Central Valley about 60 miles east of San Francisco, provides a discomfiting answer.

The cutbacks by the Martinezes and their neighbors are reflected in a modest strip of about a dozen stores in nearby Tracy. Three are empty while a fourth has only a temporary tenant. Some of those that remain say they are just hanging on.

“Before summer, things were O.K. Not now,” said My Phan of Hailey Nails and Spa. “Customers say they cannot afford to do their nails.” She estimated her business had fallen by half.

At Cribs, Kids and Teens, Jason Heinemann says his business is also down 50 percent. He opened the store in early 2006; last month was his worst ever. “Grandparents are big buyers of kids’ furniture, but when their 401(k)’s are dropping $10,000 and $20,000 a week, they don’t come in,” he said.

Mr. Heinemann laid off his one employee, a contribution to an unemployment rate in San Joaquin County that has surpassed 10 percent. He dropped his advertising in the local newspaper and luxury magazines.

As Mr. Heinemann’s sales sink, he is tightening his own belt. “I used to be a big spender,” he said. “We’re setting a budget for Christmas.”

In the window of another tenant, Wells Fargo Home Mortgage, a placard shows two happy homeowners holding a sign saying, “Someday we’ll owe a lot less than we thought.”

Someday, maybe, but not now. First American has been refining its figures on underwater mortgages, formally known as negative equity. The data company evaluated 42 million residential properties with mortgages. (Though Maine, Mississippi, North Dakota, South Dakota, Vermont, West Virginia and Wyoming were excluded because of insufficient data, none of those states have been central to the mortgage crisis.) A computer model was used to calculate current values, using comparable sales. More than 10 million homes do not have mortgages.

The figures rank the 20 ZIP codes that are furthest underwater. The 95391 ZIP code, which includes all of Mountain House and some properties outside it, has the unwelcome distinction of being first in the country.

Out of 1,856 mortgages in the ZIP code, First American calculates that nearly 90 percent are underwater. Only 209 owners owe less on their mortgages than the homes are worth.

The first homes in Mountain House were sold in 2003, just as the real estate boom began to go into overdrive. Its relative proximity to San Francisco drew many who traded a longer commuting trip for a bigger place.
 
The Martinezes bought their house in early 2005 for $630,000. It is now worth about $420,000. They have an interest-only mortgage, a popular loan during the boom that allows owners to forgo principal payments for a time.

But these loans eventually become unmanageable. In 2015, Mr. Martinez said, his monthly payments will be $12,000 a month. He laughed and shook his head at the absurdity of it.

They fear the future, so they stay home. They rent movies. They play board games. (But not Monopoly — with its real estate theme, it reminds them too much of real life.)

“It’s a vicious circle,” Mr. Martinez said. The economy is faltering because he and millions of others are not spending. This killed his career in home remodeling this year, and threatens his current work as a contractor on commercial properties.

For the moment, the family is just trying to hold on. But Mr. Martinez acknowledges that it has entered his mind to turn his house back over to the bank. “By next June, if things aren’t better, I’m walking,” Mr. Martinez said.

Many in Mountain House have already taken that option. Banks took over 101 properties in the 95391 ZIP code in the third quarter, according to DataQuick Information Systems.

Even relatively recent arrivals are feeling a pinch.

Kenny Rogers, a data security specialist, moved into Mountain House last year, buying a foreclosed property on Prosperity Street for $380,000. But the decline in values has been so fierce that he too is underwater.

He has cut his DVD buying from 50 a month to perhaps one, and is waiting until the Christmas sales to buy a high-definition television. He does not indulge much anymore in his hobbies of scuba diving and flying. “Best to wait for a better price, or do without,” Mr. Rogers, 52, said.

People deciding to do without are hurting a second mall close to Mountain House. There is a shuttered Linens ’n Things, part of a chain that went bankrupt. Another empty storefront used to be a Fashion Bug. Soccer World could not make it. Shoe Pavilion is festooned with going-out-of-business signs.

Chris and Janet Ackerson can survey this carnage from their own store with a certain equanimity. Their business, a member of the Vino 100 chain of wine outlets, is doing well.

The store opened at the beginning of the year, so long-term trends are not clear. But sales did not plunge in the last few months as they did for so many other retailers. Four more people joined the store’s wine club last weekend.

“My house is underwater, so I’m not doing too much impulse shopping or any renovation. But I’m not cutting back on this,” said Ray Lopez, a database administrator, as he placed a $24 petite sirah on the counter. “Life’s too short.”

Shares on Wall Street tumbled more than 4 percent on Wednesday as frightened investors wondered how long the economic slowdown will last, how deep it will cut, and whether Washington can do anything to stanch the bleeding.

Financial markets compounded their early losses in afternoon trading, ending down for a third day. The Dow Jones industrial average fell 411.30 points or 4.73 percent, while the broader Standard & Poor’s 500-stock index was down more than 5 percent for the day and nearly 9 percent for the week.

“It’s just a downward spiral caused by fear,” said Richard Sparks, senior equity analyst at Schaeffer’s Investment Research. “We’ve got bad news everywhere.”

Wall Street spent the day looking at Washington for guidance and reassurance, and investors did not like what they saw, analysts said.

“Wall Street is increasingly taking its cues from D.C.,” Mark Zandi, chief economist at Moody’s Economy.com, said by e-mail message. “Policymakers are deciding who survives and who doesn’t.”

The financial markets had been trading down all morning, but began a sharp slide just before Treasury Secretary Henry M. Paulson Jr. appeared at a lectern to discuss the $700 billion financial bailout. Mr. Paulson said government assets would not be used to buy troubled assets, as originally planned, but would instead go to buying stock in banks and infusing money into other financial institutions.

Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, described Mr. Paulson’s approach as “ad hoc,” and said that investors, hungry for a steady, deliberate recovery plan, were not happy.

“I think that in some ways it’s investors who are disappointed with Washington and think that Paulson has become a retailer engaged in a bait and switch,” Mr. Stovall said. “Wall Street is not that close to Broadway, but I think Wall Streeters feel better when a scenario is choreographed well.”

Oil prices also extended their decline, falling more than 5 percent to settle at $56.16 a barrel, their lowest level since March 2007.

Wednesday began with more troubling news from the retail sector. Best Buy said its sales at stores open at least a year could decline 5 percent to 15 percent from November until February. Best Buy lowered its earnings expectations to $2.30 to $2.90 a share, compared with an earlier prediction of $3.25 to $3.40.

“We had expected it was coming; it was just a matter of when,” said Christopher Horvers, senior retail analyst at J.P. Morgan. In a statement, Best Buy’s chief executive, Brad Anderson, called the economic changes of the last two months “seismic” and said the company was facing “the most difficult climate we’ve ever seen.”

“Best Buy simply can’t adjust fast enough to maintain our earnings momentum for this year,” Mr. Anderson said.

The dour outlook from Best Buy was the latest jolt from the retail sector, coming days after its rival, Circuit City, filed for bankruptcy protection. It follows a litany of grim financial news from well-known companies like Neiman Marcus, Starbucks, Gap and Nordstrom that show consumer spending contracting and retail revenue shrinking.

And analysts said they expected the bleeding to continue through the holiday season.

“We’re not done,” said Stacey Widlitz, a retail analyst at Pali Research. “This is just the beginning. Retailers are saying they’ve never seen this kind of shift in consumer behavior in this short a period of time.”

Peter Schiff, president of Euro Pacific Capital, said the battered retail numbers were evidence that America’s years-long spending bender had finally ended. He said the bankruptcy filing of Circuit City, which continues to operate, helped to signal a “permanent shift” in the service economy, and said other companies would fail before the economic crisis abated.

“The old expression, ‘Shop till you drop’ — we did it,” he said.

Shares in General Motors and Ford Motor were trading higher Wednesday morning as lawmakers in Washington called for a lame-duck session to address the imperiled auto industry. Recent financial reports show Ford and G.M. burning through cash as their sales fall, and Congressional leaders called for emergency legislation to keep them from being forced into bankruptcy.

“In order to prevent the failure of one or more of the major American automobile manufacturers, which would have a devastating impact on our economy, particularly on the men and women who work in that industry, Congress and the Bush administration must take immediate action,” Nancy Pelosi, the House speaker, said in a statement.

The drop in oil prices, meanwhile, came as the International Energy Agency, the world’s leading oil forecaster, suggested that oil consumption was falling faster than anticipated because of the global economic slump.

The slump means that oil prices could easily fall to $50 a barrel, according to oil specialists, as consumers cut their spending in response to the economic slowdown.

These concerns led OPEC’s president, Chakib Khelil, to repeat on Wednesday that the oil cartel could decide once more to trim its supplies when it meets in the Algerian town of Oran next month. He hinted that the group might even decide to reduce its production soon if prices keep sliding.

“Probably OPEC will not have a choice but to take another decision in Oran, if not before Oran, if the prices continue their decline in the market,” Mr. Khelil, who is also Algeria’s oil minister, told Reuters. At its last meeting, the Organization of the Petroleum Exporting Countries agreed to cut its production by 1.5 million barrels a day. The cuts were to take effect Nov. 1.

The price of gold fell $14 to $718 an ounce, and commodity prices ranging from coffee to soybeans to silver were also lower on falling demand.

Christina Park keeps this a big secret from her husband but is not ashamed to tell all her friends: She shops at a secondhand store for clothing every day.
Well, every day but Sunday, she said last week at Plato's Closet, a Skokie, Ill., franchise that she boasted of being among the first in line when it opened its doors more than two years ago.
Video: Shoppers Seek Second-hand Bargains
In tough economic times, cash-strapped consumers are finding bargains at second-hand shops. MarketWatch's Jennifer Waters reports.
"There are so many great deals here," she said, pointing to the $8 pair of shoes she was wearing and the $12 top. In fact, her entire outfit, including jewelry and handbag, were purchased at Plato's Closet, which buys and sells slightly used clothing and accessories, mostly for girls and women 13 years old to 25 years old.
Park said her money goes much farther at Plato's Closet than it does at stores like Abercrombie & Fitch where she's hard-pressed to find anything for $20, much less a pair of shoes and top. Plus, if she looks hard enough she'll be able to find Abercrombie & Fitch items at Plato's closet for a fraction of the price of it would have cost at Abercrombie & Fitch. "Teenagers are so picky, this is a good place to find things for them," she said.
For some teenagers, selling clothes and shopping for clothes at Plato's Closet is not unlike scouring a friend's closet. The clothes are no more than a year old, they're clean and in good form.
"The stigma on second-hand or thrift-store shopping has always been 'I don't want to buy someone else's used stuff,'" said Steve Murphy, president of Winmark Corp., which owns the Plato's Closet franchise.
"They come into our stores and they don't even know that it's used stuff. They're amazed when see that the quality that they're getting is like new but at half the price."
Winmark 
WINA 14.90, -0.10, -0.7%) owns three other franchises that buy and sell slightly used items: Play It Again Sports, Once Upon a Child and Music Go Round.
While major retailers like Macy's, Nordstrom and J.C. Penney's are reeling from slumping sales and a downbeat consumer whose confidence is dropping daily, Winmark is capitalizing on this shift to frugality.
All four franchises are turning in double-digit increases in same-store sales, the retail industry's measure of sales at stores open longer than a year, and the company reported a 19% jump in profit.
Price, environment a big factor
Murphy quickly acknowledges that a disadvantaged economy is a big advantage for second-hand and thrift stores.
"We're in a perfect storm with our economy like this and low consumer confidence people are still out there looking for value. They don't want to pay the exorbitant prices they were paying at other retailers," he said. "Couple that with the recycling movement and going green and customers are talking a lot about us and blogging about us."
The same is true at local thrift shops as well as the Salvation Army and Goodwill Industries, the nation's two largest charitable resale organizations that have seen year-to-date overall sales increases of 6% to 15%.
Comparatively, Macy's reported a 7% drop in sales and a loss for the third quarter.
The National Association of Resale and Thrift Stores said a survey of its members showed that 66.2% posted a sales surge of an average 35% from January to August compared with the same period in 2007.
What's more, 85.8% of stores said they have seen an increase in new shoppers while another 74.5% said new sellers, consignors and donors were coming in the doors.
"We have people who were once donors now coming to us and saying they need our help," said Major George Hood, a national spokesman for the Salvation Army. Some Salvation Army stores across the country have seen sales rise at a far quicker rate than donations.
"We're worried we might run out of inventory," Hood said.
Those sales increases certainly speak to the hardships that people are facing as they try to keep financial balls in the air amid a recession in the U.S. that is leaving many without jobs.
It also underscores the new attitudes toward frugality and recycling.
"People like that they're able to recycle their clothes here and get some money for them too," said Tammy Toren who owns the Plato's Closet in Skokie, Ill.
Shopping tips
And for many, shopping resale is not unlike a treasure hunt. The NARTS Web site offers consumers these tips when shopping at thrift or second-hand stores:

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Look for quality of workmanship and materials. A resale item of high quality might cost more than a lesser-quality new item. The workmanship, style and value of any well-made item from a sofa to a designer outfit provide more value at resale.
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Know the retail prices of items you are looking for to appreciate how much money you will save by shopping resale.
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Explore a variety of resale shops to find several that will become your favorites.
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Get to know the staff. Sign up for mailing lists to receive sale notices, customer-only premiums and valuable information sent out in their flyers or newsletters.
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Check all items carefully and know the store's return/exchange policies before purchasing.

The tech-heavy Nasdaq Composite Index   lost 5.2% during the day, ending below the 1,500 level for the first time since May 2003. See full story.
Outside of the tech sector, shares of Crocs Inc. (CROX:
crocs inc com
 
CROX 1.90, -0.25, -11.6%) sank 34% to $1.25 after the footwear maker swung to a quarterly loss and warned of more losses ahead. The company, known for its brightly colored line of sandals, said it expects to lose between 50 cents and 65 cents in the fourth quarter on sales of up to $120 million.
For the third quarter, Crocs swung to a net loss of $148 million, or $1.79 a share, hurt by inventory write-downs and restructuring charges. Sales fell 32% to $174 million. In the year-ago period, Crocs earned $57 million, or 66 cents a share. Crocs warned more losses are coming as it downsizes. Shares of Crocs closed ahead of the report at $1.90.