How Bad Is the Current Housing Market Decline?

Every month seems to bring more bad news about the housing market. However, economists haven't all agreed on how bad it is. Definitions of recession, bear market and a stock market correction are well standardized, but the same is not true for the housing market. Economists' studies show that housing price declines of 10-15% are enough to eliminate equity and create a snowball effect that eventually creates severe pain for homeowners. (Source: International Herald Tribune, "When Does a Housing Slump Becomes a Bust?", June 17, 2007)

Resale single-family home sales peaked in February 2007, when they were at an annual rate of 5.88 million. By September, single-family home resales had declined 25% to 4.38 million. Single-family home resale median prices peaked at $229,200 a few months later in June 2007. Since then, the median price of an existing single-family home has declined 8% to $210,200 according to the National Association of Realtors. (Source: NAR, Existing Single Family Home Sales, September 2007)

If price declines follow sales declines, it could cause a recession. If it gets bad enough, it would compare to the 24% decline experienced during the Great Depression of 1929. It would be similar to the 22-40% decline in Texas and other oil-producing states during the oil-price drop in the early 1980's. Home prices probably won't fall as far, since most homeowners will take their homes off the market before selling at such a loss. However, the next few months' data will be critical in determining how far the housing market will fall, and its subsequent impact on the U.S. economy.

What It Means to You

Real estate contributes 10% to the economy, so if prices decline, so will GDP. Furthermore, Americans use their home equity as an ATM machine, so lower home prices will mean declining furniture and other retail sales. Experts forecast GDP growth to slow to 2% for 2007, down from 2.9% in 2006.

More on Real Estate and the Economy

• How Does Real Estate Affect the U.S. Economy?
• Definitions of Commonly Used Real Estate Terms
• A Primer on Interest Rates

If you are selling your home, here are some great tips from the About.com guide to Homes, Elizabeth Weintraub.

• Selling in a Falling Market
• Avoid Mistakes When Selling in a Slow Market
• When Is the Time Right to Reduce Price?