Historic fall in home prices

The cool housing market is already trimming consumer spending somewhat.

For all the bleak news, American homeowners and consumers can take comfort on several fronts:

•Most owners are still above water, with a cushion of equity that outweighs the current price drop. Many owners have fully paid off their mortgage.

•The performance of home prices varies greatly by region. California, Michigan, and parts of Florida are among the biggest decliners. Prices are still rising in Charlotte, N.C., and Seattle. In more than 40 states, prices are not far out of line because they have tracked the growth of personal incomes, says Karl Case, a housing expert at Wellesley College in Massachusetts.

•Most owners don't have to sell, and the market should be more stable by the time they do.

•Most economists don't predict recession in the coming year, although they say the risks have risen and the pace of growth is below normal.

•For potential buyers, the housing shakeout promises to make homes more affordable in some overheated markets.

Indeed, in the long run, homeownership tends to be a boon for households that can afford it. Homeowners tend to devote a smaller share of their income to housing costs than renters do, according to Federal Reserve data. That gap has narrowed recently, however, as households have stretched to afford the rising cost of homes. In some cities, it's common to spend 40 percent or more of income for housing.

For now, many economists say, supply and demand will come into balance only as builders pare back construction and home prices fall further.

Those processes could take a while to work out. Home prices are notoriously "sticky," since owners are very reluctant to sell for less money than they paid.

Indeed, by one index released Thursday, home prices haven't fallen yet at all.

In the second quarter of 2007, home prices were 0.1 percent higher than in the first quarter, according to the house price index of the Office of Federal Housing Enterprise Oversight.

But this index doesn't include high-priced homes. And it includes price data from home refinancings based on appraisals rather than just new purchases. Gault says that Global Insight expects this index to fall more than 4 percent by 2009.

An alternative index, seen as more accurate by many economists, has been more volatile.

The Case-Shiller index released Tuesday by Standard & Poor's showed home prices down 3.2 percent in the second quarter from a year earlier. The National Association of Realtors said Monday that the median sale price in July was $228,900, down 0.6 percent from a year earlier.

None of these numbers adjust for inflation, a step that would amplify the price slump. For all the turbulence, Mr. Case says the long-term picture remains intact: "Housing has generally appreciated [in value] if it's been maintained."

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