The bright side of falling home prices is this: Most of the decline is probably over, and it should help to correct the nation's serious imbalance between housing supply and demand.
That's the view that many housing experts take, after a year of historically sharp home-price declines. The median sales price of existing homes fell in January to $170,000, down from $176,000 a month earlier and $200,000 a year ago, according to numbers released Wednesday by the National Association of Realtors.
Of course, the negative side of this trend also is real and weighs on the economy. As home prices fall, so does the net worth of homeowning families. The prospect of more foreclosures grows. That won't do anything to help the nation's troubled banking sector, which would be stuck with many of those losses.
But somehow the economy needs to work through a glut of homes on the market, an imbalance so large that falling prices are seen by many as the way to get there.
The big question is where prices will settle. The answer could vary a lot by region and will depend on where the broader economy heads.
"I think house prices will be done declining within the year," says Morris Davis, a University of Wisconsin economist who studies real estate. But, given today's uncertainties, he cautions that "anyone that tells you that they know, doesn't know."
January saw not only a price decline but also a reduction in sales volume for previously owned homes. Sales ran at an annualized pace of 4.5 million units, down from 4.7 million in December and 4.9 million for much of last year.
That pushed up the inventory of homes for sale. A 9.6-month supply of homes is now on the market, well above typical rates of six months or so. Some analysts say the inventory could rise still higher during the busier spring season, as more sellers put homes on the market.
"We're going to learn more [about activity and prices] in the spring market," Karl Case, a housing expert who helped create the Standard & Poor's Case-Shiller index of home prices, told reporters Tuesday.
By the Case-Shiller index, home prices are now down 26.7 percent from their peak in 2006.
While the real estate downturn is nationwide, it varies greatly by location.
Mr. Case, a professor at Wellesley College near Boston, says that 1 million of all homes sales in the past year were distressed auction sales. But more than half of those have come from just four hard-hit states: California, Arizona, Nevada, and Florida.
In many cities, prices are down by a more modest 5 or 10 percent.
One reason for the slower sales volume in the past few months may be that market participants are in a holding pattern, waiting to see what a new administration in the White House will do.
That was clarified recently when President Obama unveiled a plan to reduce foreclosures. It includes:
•Incentives for lenders to reduce payments for at-risk borrowers to 31 percent of income.
•Refinancing for many borrowers whose loans have turned modestly "upside down," with balances larger than the current home value.
•A proposal to allow bankruptcy judges to adjust loan terms, such as forcing banks to write down the principal balance.
If the plan succeeds in its goal of preventing several million foreclosures, it could help stabilize the housing market, some experts say.
"[Steps] to try to reduce preventable foreclosures … will reduce the supply of homes in the market," Federal Reserve Chairman Ben Bernanke said Tuesday in testimony to Congress.
He said the Fed is also having some success in efforts to bring down mortgage interest rates, which could help entice buyers into the market. With affordability now high, a key factor for home buyers is uncertainty about jobs. Access to mortgage loans is also constrained by the current credit crunch, Mr. Bernanke said.
Some experts say the Obama plan will have only a limited effect on foreclosures. For one thing, Mr. Davis notes, a key cause of foreclosures is a sudden loss of income, a problem the president's plan doesn't address. One approach might be to offer a government loan to help unemployed homeowners pay their mortgages while they find new jobs, he says.
Over time, he says, home prices tend to be correlated with rental prices – since people have a choice of whether to buy or rent. The price-to-rent ratio remains above its long-term trend.
There are some signs that, even amid the current real estate upheaval, market-participants are working toward a new equilibrium. In California, home prices have fallen 41 percent in the past year, but the discounts have lured more buyers into the market. Sales volume in December was up 85 percent from the same month in 2008.
"The faster prices reach levels that clear the market … the quicker this recession will be over," argues Scott Grannis, a California-based economist, on his website.