Facing the Housing Mess

Alan Greenspan said he was "puzzled" about why the subprime mortgage mess hadn't had a greater impact on the economy.

That was last month.

The latest economic data show that indeed the combined crunch of higher mortgage payments and higher energy prices are sapping the sales of companies ranging from WalMart to Liz Claiborne to General Motors. Overall economic growth for the first quarter was an anemic 1.3%.

Clearly, the mortgage mess impacts all homeowners, even indirectly. If the house down the block is sold at a foreclosure auction, how much is your home worth? The thought is chilling for millions of Americans who count their home as their most important asset -- both financially and psychologically.

How bad can things get? How far can home prices fall? It depends on which economist you ask. Months ago, Robert Z. Aliber, retired University of Chicago economics professor, told me home prices would drop 30%. The forecast was so shocking that I hesitated to print it.

The latest gloomy forecast -- backed up by compelling data -- comes from A. Gary Shilling, frequently bearish but even more frequently correct. To be blunt, Shilling is forecasting a drop of 40% to 50% in home prices in the more overpriced areas such as California, Florida and Las Vegas or downtown condo markets. And the ordinary homeowner, he says, could see a decline of 10% to 15% in the value of a suburban home.