> Ummm, ever hear of negative equity?
Negative equity, in and of itself, isn't terrible. In fact, the traditional 30-year timeline for a mortgage in the US is plenty of time to recover from a negative equity situation. Frankly, if I could get it, I'd hapily be negative equity on my house today. It seems quite likely that the capital required to secure a mortgage on a house could be far more productive in markets other than real estate. My equity is underperforming, for instance, S&P puts :-)
Max's point comes down to: can you afford the (interest) carry cost? If you cannot (because, for instance, your rate has gone up), the logical thing to do is rent instead. If the answer to the question has changed radically in the near past, you are probably past the prime moment for action, but there's still plenty of hope.
In a negative equity situation, the bank owns more of the house than you do, so: let them have it. There's no shame in letting a bank own an asset that you do not want yourself (see above), and they agreed to do at the onset of the transaction.
The thing that IS bad for people is the removal of their ability to pay ANY carry cost (interest or rental) -- catastrophic impact on income such as losing your job or losing your health (which is sort of the same thing). This kind of calamity is bad news REGARDLESS of what the structure of your mortgage is and is independent of how the real estate market is performing.
/jordan