Drop foreseen in median home price

The median price of U.S. homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, probably will be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines also are occurring in cities such as Chicago, Minneapolis and Houston, where increases of the past decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

While the housing slump already has rattled financial markets, it so far has had only a modest effect on consumer spending and economic growth. But forecasters now believe its impact will lead to a slowdown for a year or two.

"For most people, this is not a disaster," said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. "But it's enough to cause them to pull back."

In recent years, many families used their homes as a kind of piggy bank, borrowing against equity and increasing spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said the rise in home prices was the primary reason that consumer borrowing has soared since 2001.

Now, however, that financial cushion is disappearing for many families. "We are having to start from scratch and rebuild for a down payment," said Kenneth Schauf, who expects to lose money on a Chicago condo he and his wife bought in 2004 and have been trying to sell since last summer. "We figured that a home is the place to build your wealth, and now it's going on three years and we are back to square one."

On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody's Economy.com, a research firm.

Unless the real-estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the past decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for homebuyers.

It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 report jointly written by the top economists at five organizations — the industry groups for real-estate agents, homebuilders and community bankers, as well as Fannie Mae and Freddie Mac, the large government-sponsored backers of home mortgages — was typical. It said that "there is little possibility of a widespread national decline since there is no national housing market."

Top government officials were more circumspect but still doubted prices would decline nationally. Alan Greenspan, the former Fed chairman, said the housing market was not susceptible to bubbles, in part because every local market is different.

In 2005, Ben Bernanke, then an adviser to President Bush and now the Fed chairman, said "strong fundamentals" were the main force behind the rise in prices. "We've never had a decline in housing prices on a nationwide basis," he added.

But Global Insight, the research firm, estimates that the home-price index to be released Thursday by the Office of Federal Housing Enterprise Oversight, a regulatory agency, will show a decline of about 1 percent between the first and second quarters of this year. Other forecasters predict that the index will increase slightly in the second quarter before falling later this year.

In all, Global Insight expects a decline of 4 percent, or roughly 10 percent in inflation-adjusted terms, between the peak earlier this year and the projected low point in 2009. California prices are expected to decline 16 percent — or about 20 percent after taking inflation into account.

The government's index, which compares the sales price of individual homes over time, is intended to describe the actual value of a typical house. Since the index began in 1975, it has slipped from one quarter to the next on a few occasions, but it never has fallen over a full year. Another index dating to 1950, calculated by Freddie Mac, also has never shown an annual decline. Price data published by the National Association of Realtors, based on the prices of houses sold in a given year, also have never declined. According to the association, the median home price is now about $220,000.

Housing prices previously have declined for long stretches in various regions. Most recently, prices fell in California and in the Northeast during the recession of the early 1990s.

The current slump is different, though, in both depth and breadth. In fact, the national median price rose only slightly faster than inflation from 1950 to the mid-1990s.

But as interest rates fell and lending standards became looser, prices started rising rapidly in the late 1990s, even in places such as Chicago, which rarely had seen a real-estate boom. The result was a "euphoric popular delusion" that real estate was a can't-miss investment, said Edward Gjertsen, president of the Financial Planners Association of Illinois. "That's just human nature."

Prices in Chicago peaked in September 2006 and have since dipped 1.7 percent, according to the Case-Shiller home-price index, tabulated by MacroMarkets, a research firm.

For all the attention that the uninterrupted growth in national house prices received, some economists argue that it was misplaced. The Case-Shiller index, which many experts consider more accurate than the government measure, did show a drop in prices in the early 1990s. (Unlike the government's measure, it includes mortgages of more than $417,000, which are not held by Fannie Mae or Freddie Mac.)

After adjusting for inflation — the most meaningful way to look at any price, economists say — even the government's measure showed a drop in the early 1990s.

Dean Baker, a Washington, D.C., economist who has been arguing for the past five years that houses were overvalued, said the idea that house prices could go only up had fed the bubble.

"It was very misleading," said Baker, co-director of the Center for Economic and Policy Research, a liberal research group. There are a lot of people, he said, who bought "homes at hugely inflated prices who are going to take a hit. You also have a lot of people who borrowed against those inflated prices."