And when home values fall, shocks destabilize the financial system and the economy, setting off still more ripples.
Trouble has even been showing up in a seemingly safe and sound corner of the financial world: money market mutual funds. Most people treat such funds as the equivalent of bank savings accounts. Customers, who favor them because they generally pay higher rates than bank accounts, have parked $3 trillion in them -- nearly a quarter of all the money held by the nation's mutual fund industry, according to the Investment Company Institute.
The problem is that money market funds differ from bank accounts in two key ways.
First, they're not covered by the Federal Deposit Insurance Corp. (Money market funds, which are offered by mutual fund companies and are not federally insured, should not be confused with money market accounts, which are offered by banks and are insured.)
Second, a fraction of the money put into money market funds recently has been used on investments that have gone sour. That has forced some companies offering the funds to rush to plug the losses.
Legg Mason Inc. and SunTrust Banks Inc., for example, recently had to pump $1.4 billion each into its money market funds. Bank of America Corp. has injected $600 million.
The culprit in those cases doesn't appear to be housing prices alone so much as the wildly complicated securities that investment firms created out of mortgages and a laundry list of other hard-to-price (and therefore risky) assets such as timber and highways.
The idea behind such financial concoctions was that if each security contained only a small share of each of those items, the overall security would be safer than the individual assets that underpinned them. But it hasn't worked out that way, according to Mason of Louisiana State University.
"New financial instruments are invented every day. Normally they get boiled down to a standardized form," he said. But this time, banks and investment houses sought to maintain high profits and a lock on the markets by keeping their inventions "customized."
The result today is that nobody can figure out how risky the new securities are, how much they are now worth or how dependent their owners -- mostly big institutional investors -- are on them.
In such circumstances, investors and customers will seek answers by using the extraordinarily crude technique of trying to knock over one institution after another and seeing if each survives.
