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Housing: a crisis with staying power

Americans just witnessed the biggest housing boom in their history. The impact of the bust that has followed looks to be wide and long-lasting. First of a three-part series.

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The current deflation of home prices is changing America.

It's a real estate storm that made landfall like a slow-moving Gulf Coast hurricane here in south Florida and in other once-booming housing markets last year. In recent months it has gathered momentum and spread, shaping up to become perhaps the worst home-price slump since the 1920s and '30s.

The bust promises to have lasting effects. Among them:

•It is defining the limits, for now, of what President Bush has called the "ownership society." A surging foreclosure rate means that the rate of homeownership, after a historic rise, is falling.

•It's forcing a rethink of economic policy. The Federal Reserve is expected to ease interest rates this Tuesday. Over the longer term, today's hard lessons might influence the way the Fed and the mortgage market operate.

•It affects the mood of America entering the year of an up-for-grabs presidential election.

•It marks a pocketbook shift for consumers – and perhaps even global investors – from an era of housing-fueled wealth to belt-tightening. Real estate can no longer be viewed as a surefire investment.

"We are in the aftermath of the biggest housing boom in history," says Robert Shiller, a Yale University economist. "We are in a period of exceptional uncertainty about the value of our homes."

It is that issue – how far home prices rose – that sets this bust apart from other US housing downturns in the past century. This is more than a typical cycle where the pace of home building plummets. And this goes well beyond a crisis of subprime borrowers.

That's because this housing cycle now puts the wider economy at risk through several channels. First, the dive in home sales and construction subtracts directly from economic growth. Second, the erosion of property values is beginning to affect consumer confidence and spending. Perhaps more serious, write-downs of bad loans are crimping the health of banks, raising concerns that the flow of credit could be choked off despite Federal Reserve efforts to keep interest rates low.

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