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By David Leonhardt, Vikas Bajaj
New York Times

Published on: 08/26/07

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.Thinking of Selling Your Home? Let REALTORS® Compete For Your Business!

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably 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 are also occurring in cities such as Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

Home prices in Atlanta —- which rose far less than in some other cities during the first half of this decade —- are essentially flat.

The predicted national reversal is particularly striking because many government officials and housing-industry executives had said that 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 has already rattled financial markets, it so far has had only a modest effect on consumer spending and economic growth. But forecasters believe its impact will lead to a slowdown over the next 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 their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing had soared since 2001.

Now, however, that financial cushion is disappearing for many families. 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, 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 last decade. And for many families who do not plan to move, the year-to-year value of their house matters little.

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."

In 2005, Ben S. 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 quarter of this year. Other forecasters predict that the index will rise 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. In California, prices are expected to decline 16 percent —- or about 20 percent after taking inflation into account.

Since the index began in 1975, it has slipped from one quarter to the next on a few occasions, but it has never fallen over a full year.

Another index dating back to 1950, calculated by Freddie Mac, has also 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, have also never declined. According to the association, the median home price is now about $220,000.

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