In the boom, prices up 90 percent
What caused US home prices, as tracked by the Standard & Poor's Case-Shiller index, to shoot up nearly 90 percent in the first six years of this decade?
Easy credit laid the foundation for the run-up. But it also gathered a momentum of its own. As people saw the annual gains in home values outstrip the interest on a loan, they piled into the market.
Some worried that if they didn't scramble to buy, they'd never get another chance. Others were investors eager to "flip" homes for quick profits.
When home values finally maxed out in 2006 – not because of any general trouble in the economy but because asking prices outstripped the means of new buyers – the stage was set for a reversal. Speculators backed out of the market and defaults began to rise for subprime borrowers, who face higher interest rates because they present a higher risk to lenders. When adjusted for inflation, housing prices have fallen an average of 8.9 percent this year, according to Mr. Shiller (see chart below). Most economists expect them to fall further.
Economists differ on whether this housing slump is tipping the nation into its first recession since 2001. It is certainly a big drag on growth.
Recession or no, it appears clear that some of the repercussions will be long-lasting.
Start with a historic surge in foreclosures that has made some neighborhoods look like disaster zones. The problem may not crest for several years.
Here in Florida, many of the buyers who got burned were investors who expected to buy and then quickly resell homes in a rising market.
"There's a lot of people that stuck their neck out," says Richard Ray, a longtime resident who works at a marina in Cape Coral, with a rate of foreclosures in process – 5.4 percent of all mortgages – that leads the nation.