The Slump Hits Home

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The "For Sale" sign went up on John Share's lawn on Sept. 11. Since then, his family has had a handful of showings and open houses. But their five-bedroom rambler in St. Louis Park, a middle-class suburb of Minneapolis, Minn., has not sold. A communications officer for U.S. Bancorp, Share listed his house at $284,500 and recently reduced it to $275,000. "It's been almost two months," he says, "and still nothing."

In America's shaky housing market, many home sellers can relate to the Shares' plight. Economic fallout from September's terror attacks threatens to tip a nationwide housing slump into a nasty downturn. Existing single-family home sales in September fell 11.7% from their August level. And while some Realtors say sales rebounded in October, inventories of high-end homes are rising, and housing starts are flat.

Such trends have made housing a battleground for holding the economic slump in check. Says Yale economist Robert Shiller: "If housing crumbles, the economy could be hard pressed to recover." Housing-related expenditures account for about $1 trillion in the $10 trillion U.S. economy. The latest studies suggest that a decade of appreciating home values may have ignited more consumer spending than a rising stock market--a point Federal Reserve Chairman Alan Greenspan acknowledged in a speech last summer.

High-end homes in previously sizzling markets like San Francisco are selling at discounts of around 20%, and that could bode ill for property values elsewhere. Midpriced homes in cities like Boston and Austin, Texas, could be next, experts say, and if the value slump proves contagious, the effect on the capital markets could be corrosive. "If prices fall, you get rising foreclosures and losses to lenders," says Karl Case, an economist at Wellesley College. "That undermines their ability to make credit available to good borrowers."

So far, that spiral has not set in. As Case points out, "It takes a big bang to get housing prices to crack nationwide," and the market's fundamentals remain sound. Mortgage rates are near 30-year lows, which makes homes more affordable, and the U.S. Treasury's decision last week to end sales of 30-year bonds should keep rates low for a few more months. "It was a brilliant move," says economist Mark Zandi of Economy.com "They saw that housing was the one sector of the economy that was holding up and was starting to fade."

Except in the luxury market, home values on average have not slipped much. The median price of an existing home--$148,100 in September--is still 4.6% higher than it was a year ago. For overall sales, says David Berson of mortgage investor Fannie Mae, "we expect the peak-to-trough fall to be 10%, a smaller drop than we normally see in a housing downturn."

Cushioning the decline will be the limited stock of affordably priced homes. In most cities, they're still selling well, though some real estate pros are advising prospective buyers to sit tight. Says Christine Baker, a broker in Cottonwood, Ariz.: "To go in now, when you don't know if you'll have a job tomorrow, is risky."