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The housing market appears to be in a free fall. On Tuesday, Standard & Poor’s released its nationwide housing index showing the steepest rate of decline in U.S. home prices in 20 years.

Just one day earlier, The National Association of Realtors reported that sales of existing homes dropped for a fifth straight month in July, while the number of unsold homes shot up to a record level.

Bill Henegar, a Blount County home builder with Henegar & Henegar Builders, said, “We’re certainly seeing it here — the market is just flooded. Unfortunately, many of the people struggling with homes right now have interest-only and adjustable-rate loans. Many of those people should have never been given those loans in the first place.”

To add to the mortgage meltdown and rising number of foreclosures, the federal government is now considering a proposed cutoff of mortgage interest tax deductions for homes with more than 3,000 square feet of space.

U.S. Rep. John Dingell of Michigan, the chairman of the House Energy and Commerce Committee and one of Capitol Hill’s most powerful legislators, is drafting a bill that would do just that. He plans to introduce the legislation when Congress returns next month.

In addition to raising federal taxes on gasoline, the forthcoming bill would, according to Dingell, “remove the mortgage interest deduction on McMansions — homes over 3,000 square feet.”

“In order to address the issue of climate change, we must address the issue of consumption,” Dingell said recently during a town hall meeting in Ann Arbor, Mich.
“We do that by making consumption more expensive.”

Supporters of Dingell’s proposed legislation, called the “carbon tax” bill, say homes — like automobiles — contribute to greenhouse gas emissions through heating, cooling, electrical usage, building materials and the infrastructure required to support them. Other communities across the nation have already placed restrictions on energy consumption to discourage the development of oversized homes.

Henegar said he opposes restrictions on homes based on size, and he believes people should be able to construct the type of home they want regardless of square footage.

“I have a real problem with removing the mortgage interest deductions from bigger homes,” Henegar said Tuesday. “More tax isn’t the answer. People who are working hard and buying new homes shouldn’t be penalized like that.
“We have a tendency to always turn to another new tax as a solution — but it isn’t a solution. All it does is increase the burden.”

Turning to auctions

As the housing market slows and foreclosures spike, people who have to sell quickly or lenders that need to unload properties they took back at sheriff’s auctions are turning to auctioneers for quick sales. Even some home builders and condo developers are using auctions to reduce excess inventory.

These auctions differ from sheriff’s sales, trustee’s sales or courthouse sales, which conclude the foreclosure process and are conducted by the county. Often, the lender wins the property at these sales and then tries to resell it by auction.

Last year, revenue from housing auctions grew 12.5 percent to $16 billion from $14.22 billion in 2005, according to the National Auctioneers Association. From 2003 through 2006, residential real estate was the fastest expanding auction sector, the trade group reported.

Auctions represent only a sliver of the overall housing sales market, just less than 1 percent of the $1.74 trillion in existing home sales last year.

But those in the real estate auction industry are hoping the current market conditions will continue to boost business. Already, states that never hosted many housing auctions are seeing demand jump as home prices plunge and more borrowers find themselves trapped in unmanageable mortgages.

Investors leery

Analysts said the financial market turbulence that has occurred in August will mean further downward pressure on home sales as big investors such as hedge funds grow more leery about purchasing mortgages that have been packaged into securities for fear that the rising number of defaults will mean they won’t get repaid.

Even before the latest market turbulence, banks and other lenders were tightening up on their loan standards in response to rising delinquencies, especially on subprime loans extended to borrowers with weak credit histories.

“With fewer buyers qualifying for loans and lots of unsold houses out there, that makes a choice recipe for further sales declines this fall and into the winter,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc.

Hoffman said there is a growing threat that the severe slump in housing and sagging consumer confidence will weigh on consumer spending in the second half of this year, presenting a significant risk to the overall economy. But he said he believed the country would be able to avoid an outright recession because the Federal Reserve will decide at its next meeting on Sept. 18 to cut the federal funds rate, the key benchmark rate for millions of consumer and business loans.

Hoffman said he expected the September Fed rate cut would be the first of several as the central bank steps up its efforts to combat the current turbulence. The Fed in the past two weeks has supplied the banking system with billions of dollars to encourage banks to keep making loans and on Aug. 17 announced a half-point cut in its discount rate, the interest it charges to make direct loans to banks.

The Associated Press contributed to this story.