No event is more closely linked to our current economic disease than the collapse of the housing market. The Wall Street Journal’s S. Mitra Kalita illustrates that nicely in a new story out of Hagerstown, Md.--a community whose rise and fall was heavily tied to housing.

As the president tours the country promoting his stimulus (Jobs Act) plan, stories like this provide clues as to why the economic rebound has come up so short and also point to why another stimulus bill and massive relief to homeowners is so necessary.

Federal Reserve flow of funds data shows that U.S. households lost $5.8 trillion in owner-occupied real estate wealth and over $1 trillion in financial assets from 2007 to the second quarter of 2011. Since some share of wealth gets channeled into spending, that loss creates a massive hole in GDP. Economists have estimated that about 9 cents of every dollar of extra housing wealth eventually gets spent over the course of a few years. This means that households have lost $525 billion in buying power just from housing depreciation (and more when lost financial wealth is considered).

Those losses are enough to cancel out most of the $840 billion in federal tax relief and spending provided by the 2009 stimulus bill. The wealth reductions, moreover, come on top of the demand-reducing effects of high unemployment, stagnant wages, and the European recession.

These dynamics play out at the metropolitan scale very differently. New data from the 2010 American Community Survey can be used to estimate how much housing wealth has been lost in each metro area since 2007. The numbers are self-reported and seem to understate losses in real estate values when compared to data from the Federal Housing Finance Agency. Nonetheless, the results are staggering.

Housing wealth has fallen in 68 of the 100 largest metropolitan areas; those losses total $2.1 trillion. The metros with the largest percentage decreases in wealth are those with some of the highest unemployment rates. They include many in California, such as Stockton, Modesto, Riverside, Bakersfield, Sacramento, and Fresno, as well as many in Florida like Cape Coral, Orlando, Miami, and North Port. Las Vegas and Phoenix are among the ten with the largest losses. All of these metro areas lost at least 30 percent of housing wealth according to self-reported data from 2007 to 2010.

After adjusting for metropolitan income levels, one would expect these housing value loses to translate into anywhere from a 9 percent reduction in consumer spending (in Fresno) to an 18 percent reduction in Stockton.

Meanwhile, 32 metros saw modest gains in housing values from 2007 to 2010. The highest gains were typically in Texas--in metros like San Antonio, McAllen, Houston, and Austin. Texas has famously strict mortgage standards and was one of the last states to allow banks to freely merge and acquire other banks (California, Nevada, and Arizona were among the first). IMF economists found that these deregulations led to more sub-prime lending.

On the New York Times Economix blog, professor Casey Mulligan argues that housing losses sap the incentive for workers to take jobs because much of their income will go to creditors. He implies that there are millions of workers turning down jobs--which is highly unlikely. Fourteen million fewer workers quit their jobs in 2010 than in 2007, and those that did in 2010 represent a smaller share of total separations. There were also 21 million fewer job openings. Jobs are especially scarce for workers without post-secondary education, as we showed in a recent report.

Any way you look at it, the housing crisis is a macroeconomic crisis. The metro variation illustrates the severity of the problem nationally, even if some regions have been spared. Broadly, consumer spending has been effectively reduced by 2.7 percent in the average large metro (using the 2010 Census data) or 4 percent across the nation (using the 2011 Federal Reserve data). Arguably, such a massive anti-stimulus can only be counteracted in two ways: 1) more federal spending, like the American Jobs Act; and 2) massive mortgage refinancing along the lines of the plan developed by Alan Boyce, Glenn Hubbard, and Christopher Mayer. Their plan would add an estimated $70 billion to household budgets at no cost to taxpayers.

Mortgage refinancing won’t directly increase household wealth, but it will directly increase disposable income by reducing monthly mortgage payments. It would have the added benefit of preventing foreclosures, which only drives down housing prices further. That is just the kind of stimulus we need.

The alternative, as Japanese economist Richard Koo has argued, is to end up like Japan, which suffered from a massive commercial real estate crash, tried to balance its budget deficit, and has since confronted a decade of economic stagnation.