Falling prices are both good and bad for many reasons.
Good, because prices in many parts of the country were way too high. Affordability had become a big problem, especially on the coasts.
Bad, because I could not even get close to what I paid for my house 6 years ago. I live in Michigan and am a little worse off than other parts of the country - Michigan never had the big run up as other markets did and the economy here is terrible. If I ever have to move, I am in big trouble.
Just my quick thoughts.

Falling home prices lock many people into homes for much longer than would be otherwise, thus crimping mobility and economic activity.

Oh, and something about falling home prices bringing our financial system to its knees.

Falling prices are good for everyone. I'm a potential buyer, but I do not think this is a biased opinion (explained below).

For buyers it means you'll get more house for the money or be able to buy what you want for less debt than in the boom years. Those of us who saw that prices have become astronomical and would not pay such ridiculous prices (particularly in the Baltimore/DC suburbs) just have to wait out the declines and avoid jumping in too soon like all the realtors, brokers, and salespeople want.

For sellers it's also good. This seems counter-intuitive. Say you live in a house that was worth $300k and you wanted a house that was $600k. You'd have to fork out that additional $300k. However, if housing prices drop by 40%, then your house sells for $180k, the other house sells for $360k, and now you only have to pay $180k to move up. You just saved $120k because prices have declined. The variables here are local neighborhoods and how cooperative a bank would be if you have to short sell. I have absolutely no sympathy for anyone that bought with an ARM though. That's way too much risk. Same goes for people who used their houses as ATM's to repeatedly HELOC with.

There is far too much imaginary wealth created by credit and over-leveraging. Getting back to historical norms is the fastest way to end the current economic crisis.

It's tough on longer term owners who *thought* their home was worth more than they had any reasonable right to believe it was worth... and it's tough on those owners who bought as the market was cresting... but (and I recognize it is a tough to swallow but) getting the prices back to a level that is (er, uhm) rational is in the best interests of everyone else in the market.

The relatively few owners who find themselves upside down due to this flux and even those who brought that condition onto themselves... have some reasonable and rather generous outs being made available to them.

caveat emptor!

MD may be better off than most, but I don't see how 12% nationwide being upside-down nationwide could be considered "relatively few" (in NV it's something like 50%).

It's a very complex question, but I think in the long run it's a good thing for home prices to drop.

Stats like price to rent and price to income as well as the overall homeownership level are still well above their historical norms. And if prior booms are any indication, they'll drop below that level before things return to normal.

Maybe the gov't intervention will keep prices from plunging, but I feel like it's just going to prolong the pain. It's no surprise that the areas that have seen the biggest price drops have started to see a pickup in sales.

"MD may be better off than most, but I don't see how 12% nationwide being upside-down nationwide could be considered "relatively few" (in NV it's something like 50%)."

I'm making a distinction between those who -on paper- are upside down vs those who who are in actual distress because of the change in market value.

And I'll stick with my ambiguous and anecdotal phrase "relatively few" for this latter group.

it is good for individuals who practice fiscal responsibility, and have waited on the sidelines for a return to economic reality.

it is bad for those who have been fiscally irresponsible, and who have overextended themselves to buy more than was affordable, or used home equity as a cash machine, and are now underwater.

it is pshycologically bad for those who bought pre-bubble, and have watched their home 'value".