Other articles by Kathleen M. Howley:

Phoenix: worst Oct. housing market in USPhoenix leads U.S. home price decline as lenders unload housesMortgage problems hit 1 in 10 US homeownersMortgage defaults hit military especially hard Bankruptcy law pushing up foreclosures Home buyers gain upper hand 23% of 2005 home loans 'interest-only'

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The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers.

The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

"It's a blood bath," said Mark Kiesel, executive vice president of Newport Beach, Calif.,-based Pacific Investment Management Co., the manager of $668 billion in bond funds.

"We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit," he said.

The Tucson housing market is faring better, with home sales this year expected to be near 2003 pre-boom levels and average time on the market near the historic average, according to local analysts. (See story, Page A4.)

But nationally, confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported Tuesday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

"It's not just a housing recession anymore, it looks more and more like an economic recession," said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.

Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

"I continue to believe that we haven't seen the bottom in the subprime market," Viniar said on a June 14 conference call with reporters. "There will be more pain felt by people as that works through the system."

Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

"There isn't a recovery about to happen," said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., the Red Bank, N.J.,-based homebuilder. The company's stock tumbled 42 percent this year through yesterday.

The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to data compiled by McLean, Va.-based Freddie Mac.

Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won't qualify for fixed-rate loans. Many have seen their home's value drop as their interest rates move higher.

"When all these people see their mortgage payment and it's up 40 or 50 percent, they're going to say, 'We can't stay in this house,' " Pimco's Kiesel said. "And there are millions of people in this situation."

The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

"Prices are going lower," he said.

The housing sector will push the U.S. economy into recession unless the Federal Reserve cuts its benchmark rate at the first surge in unemployment, said Kiesel, who expects the Fed to reduce rates.

Homeowners also had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.