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.

The median price of an existing single-family home has declined 4% since its peak in October, 2005, according to the National Association of Realtors. This compares to a 24% decline during the Great Depression of 1929, and a 22-40% decline in oil-producing areas during the oil-price drop in the early 1980's. By those standards, the current slump is barely noteworthy.

However, some 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. In some communities in Florida, Nevada and Louisiana, that has already occurred. (Source: International Herald Tribune, "When Does a Housing Slump Becomes a Bust?", June 17, 2007)

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. Expect further slowing in economic growth until the housing market correction, slump, crash or whatever-you-want-to-call-it starts to improve.

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?