Why the surge in home sales is bad news.

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not only maintaining its value but providing a nice cushion that you could cash out for a comfortable retirement is no longer in effect.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 hail storm 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 the fire-sale prices are still up in the yards in places like Riverside, it won't be.

*Correction: This story originally used incorrect purchase and sale prices for the Riverside home; however, the 75% drop remains the same.