Bailout's failure bad news for housing market

"If they don't do something, they're going to shut down real estate completely," said Richard Shuman, a real estate agent and mortgage broker near Orlando, Fla., who has seen his business dry up over the past week as the nation's financial system was gripped by paralysis.

The situation is dicey enough to make anyone thinking of buying a home queasy.

"The predominant feeling is confusion," Jeff Casimir, a 27-year old teacher in the nation's capital, who is considering buying a home with his wife, wrote in an e-mail message last week. "I really have no idea what impact all these buyouts, takeovers, and proposals will have for me."

U.S. home prices have already fallen about 20 percent since their peak in early 2006 and are expected to sink another 10 percent over the next year, according to Mark Zandi, chief economist with Moody's Economy.com. New data for July out Tuesday from the Standard & Poor's/Case-Shiller home price index will likely show more price declines in cities coast to coast.

Without a broad government response to the credit crisis, the economy, which many believe to be in recession or near it, would certainly worsen, analysts say. Unemployment, currently at a five-year high of 6.1 percent, could rise to double-digit levels as credit dries up.

"Businesses are going to begin shuttering operations and laying off workers," Zandi said. "That will hammer all consumer spending and housing demand."

Existing home sales were down almost 11 percent in August, compared with a year ago, while new home sales tumbled almost 35 percent. There's more than a 10-month supply of homes on the market.

Making matters worse, many potential homebuyers are having a hard time qualifying for a mortgage. Lenders, burned by record defaults and foreclosures, are only giving loans to borrowers with the best credit.

One silver lining, however, is that falling home prices have made homes more affordable for working families. And nervous investors helped push down the average rate on a 30-year, fixed rate mortgage to 6.12 percent on Monday, down from 6.22 percent on Friday, according to financial publisher HSH Associates.