Why the surge in home sales is bad news

What this means for homeowners is that if you happened to buy at the peak of the boom, your house is unlikely, in inflation-adjusted terms, to get back to the price you paid for it for another decade at best, if ever.

You may think that this goes just for the most inflated markets like the real estate speculation capitals of California and Florida, but that's not true. Look at the historical numbers, and you'll see that just about any coastal market is still priced 75% higher than it was in 2000.

And even markets like Charlotte, N.C., and Cleveland have real-estate prices twice (and sometimes three times) where they stood at the end of the late '80s boom.

The bottom line is that incomes just haven't risen enough to support this kind of increase.

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Just a few days ago, Alan Greenspan, the pope of the economic boom, confessed that he had no idea that home prices would crash the way they have because, well, it had never happened before.

Clearly, we're past the point now at which anybody believes that.

But the prevailing wisdom remains that if you hold on to your house for a long time, eventually you'll do fine. Don't count on that.

Yes, markets come back, but a bubble is an irrational rise in prices, and once the balloon is pricked, it doesn't magically inflate again. For a cautionary lesson, look to Nasdaq, the stock market on which most technology companies were listed at the height of the Internet and tech boom. Even before the market crash of the last weeks, Nasdaq hadn't come anywhere close to getting back to its March 2000 top.

The consequence for anybody who owns a home is that the reigning turn-of-the-millennium assumption that you could count on your house not only maintaining its value but providing a nice cushion that you could cash out for a comfortable retirement is no longer in effect.

Over the long run, this will have some good effects, as folks start actually saving money and as we see our catastrophically low savings rate go up to a more realistic level.

But over the short run, it'll have terrible effects as the cycle of foreclosure sales and falling prices works its way through the system.

Some policymakers have worried that a bailout of homeowners could encourage people who can afford their mortgages to go into foreclosure and take advantage of generous bailout terms. They can stop worrying: Homeowners already have incentives to walk away from their upside-down mortgages a lot bigger than any bailout would give them.

The only consolation here if you're watching your house plummet in value is that this will hurt the world's banks even worse than it hurts you. This has been the year of the butterfly -- you know, the one that flaps its wings in Brazil and causes a hailstorm five months later in Guangzhou, China. For many years, it was vaguely assumed that we were all connected in some ineffable way. Well, we now know pretty well what glue was connecting us: the U.S. real estate market.

Every time a borrower defaults on a condo in Miami, a bank in Switzerland or an investment fund in Norway takes a hit. Every time a bank writes off another few billion dollars in bad debts, analysts cross their fingers and mutter "maybe this time it's the last." As long as the padlocks are on the doors and fire-sale prices are in the yards in places like Riverside, it won't be.

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