A historic decline in home values comes down to this: Even if you never signed papers on a risky loan during the real estate frenzy, you may now be paying a price.
In recent decades, it has been uncommon for US home prices to fall much, even during recessions. One government measure has never shown a year-over-year decline in its three-decade history.
But the current economy is far from normal – with the housing market in a period of persistent decline at a time when many other economic indicators are positive.
By one index released this week, home prices are down 3.2 percent from a year ago. Clear-cut gauges of US home prices only go back through the 1970s, but that decline probably exceeds any price drop since the Depression, except for one year during World War II. Economists say the trend could continue well into next year.
Net worth is falling for millions of families as a result. If consumers, feeling less wealthy, cut back on spending, the risk of a national recession would rise.
Why are home prices declining, when by many measures today's economy is much healthier than that of the 1930s? Basically, the good times for housing ran for so long, and prices rose so fast at the boom's peak, that it was unsustainable.
"This time, the problem with housing is not so much that interest rates became especially high.... It was that house prices became especially high," says Nigel Gault, an economist at Global Insight, a forecasting firm in Lexington, Mass. "What was unusual this time is that we had such a long period without any downturn."
This rare beast of a cycle makes it hard to know where prices are headed next. A year ago many economists were wondering if the housing downturn was near bottom. It wasn't. Now economists are again revising their forecasts downward.
This month, evidence began to pile up that the slump is growing longer and deeper. The inventory of homes on the market surged in July, according to the National Association of Realtors. And credit conditions for home buyers tightened dramatically, as lenders are no longer able to sell less-than-prime mortgage loans to investors.
The impact is sharpest for the borrowers who took out supbrime loans, and the lending firms that financed them (generally not traditional banks). But most homeowners nationwide are taking a hit.
Many recent buyers, those who purchased since 2004, had to pay artificially high prices for their homes, thanks to the easy credit conditions and a rising tide of speculators who fueled the home-price surge at its peak. Now their home equity may be lost amid the current credit squeeze.
Even longtime owners have lost some wealth. "You're losing some of that gain," Mr. Gault says. "It may make you a bit more cautious in your spending [and] less willing to tap home equity."
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."