MELISSA BLOCK, host:
From NPR News, this ALL THINGS CONSIDERED. I'm Melissa Block.
ROBERT SIEGEL, host:
And I'm Robert Siegel.
There were more signs of trouble in the housing market today. A federal report that's shown home prices rising like clockwork since 1994 finds they were flat this spring and could be heading lower. Another barometer of home prices out this week had its steepest drop ever.
BLOCK: Economists aren't panicking over that news, but they say it's striking evidence that the real estate slump is turning out to be more prolonged and widespread than predicted. And it's going to be a bigger drag on the overall economy over the next year.
NPR's Chris Arnold reports.
CHRIS ARNOLD: People in the real estate industry like to say that housing is local. When prices were rising, many argued that we wouldn't see a real nationwide housing slump, or bursting bubble, because when prices fall in some neighborhoods, they rise in others. This time, though, especially when you look at larger metro areas, things are different.
Bill Cheney is chief economist for John Hancock Financial Services.
Mr. BILL CHENEY (Chief Economist, John Hancock Financial Services): The people who say that housing markets are local are correct. But what's so remarkable in this cycle is that we've had this synchronized boom and bust across so much of the country. Almost all the big metro areas saw prices run up. And almost all of them have seen prices come down now.
ARNOLD: The closely watched Case-Schiller housing index earlier this week spooked Wall Street when it showed a sharp drop in home prices - down more than 3 percent in the second quarter alone.
Karl Case is a housing economist who helped develop that index, which goes back 20 years.
Professor KARL CASE (Economics, Wellesley College): It's the actual lowest figure we've seen ever since we produced the index. This is the largest decline.
ARNOLD: Many economists expect total declines of about 10 percent throughout many parts of the country and up to 25 percent in some of the formerly hottest markets. The boom was fueled by the lowest interest rates in 50 years that enabled people to pay higher prices for homes. Also, lenders got aggressive and sometimes careless. And suddenly, all kinds of people were getting exotic, risky loans.
Ms. TAMI AMATO (Homeowner, Boston's Dorchester Neighborhood): They gave me an adjustable loan that was fixed for two years.
ARNOLD: Tami Amato is sitting at the kitchen table in the modest house she bought for her and her three kids back in 2005 in Boston's Dorchester neighborhood. She says she could afford the initial 6.4 percent rate. Amato says her lender promised her that the loan payments would never go up because she could refinance before they did. But that wasn't true.
Ms. AMATO: It went up to 9.4 percent. And then I just thought, you know, I can't do this.
ARNOLD: Today, the house is full of moving boxes and almost devoid of furniture. Amato's afraid that the bank is going to foreclose any day now and she's been moving her things into storage.
There's a huge wave of these risky mortgages just starting to adjust sharply higher. Many economists now estimate that between two and three million people will lose their homes. As those homes come back on the market, they'll add to the housing glut. Meanwhile, tighter lending standards will mean less home buying and less construction spending.
Prof. CASE: This is looking like the economy is going to slow substantially more than people thought.
ARNOLD: Karl Case says one of the big concerns is how average consumers will react to falling home prices and the lending industry turmoil.
(Soundbite of car engine revving)
ARNOLD: Out in of Garden Grove, California, Bob Clayborn is revving his 1959 Thunderbird.
Mr. BOB CLAYBORN (Manager, Printing Industry): It's a Ford big-block V8, cast iron pushrod motors. And there's no better way to burn gas or burn up tires in Southern Cal than this.
ARNOLD: Clayborn is a manager in the printing industry. Back a couple of years ago, he was thinking about taking out a big home equity loan to put his daughter into college and have about $15,000 left over to fix up his car.
Mr. CLAYBORN: But I can't afford to do that right now.
ARNOLD: He's borrowing the college money, but putting the car project on hold. In Clayborn's case, though, that's because he just doesn't want to pay the higher interest rates on home equity lines of credit, which have about doubled since 2003.
Mr. CLAYBORN: You know, I've been in this house for 20-some-odd years, so I've got, you know, a ton of equity built up. It's not like I, you know, just bought in bought in three years ago. So, you know, if I see the interest rates are coming down the way they were a couple of yeas ago around, you know, 4, 5, 6 percent, you know, I'm going to be right back in front of that loan officer, renegotiating my deal and getting my car fixed.
ARNOLD: That's one of the reasons that many economists aren't too worried. The new federal numbers out today show that the median national home price is still more than 50 percent above where it was just five years ago. So they say that's bound to keep a lot of consumers feeling pretty confident.
Chris Arnold, NPR News.
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