[Written June 2011] People who bought homes in the last five years have seen a sickening drop in real estate prices. But thanks to low mortgage interest rates in that time, owners can absorb a reduction in home values and still end up about as well off as typical buyers in the last forty years.
Compare a buyer in 2008 with a 30 year mortgage at 6% interest to a buyer in 1971. Forty years ago, a similar mortgage charged 7.3% interest. Adding principal and interest together, the 1971 buyer paid 2.5 times the principal amount over 30 years. The 2008 buyer will pay 2.2 times the principal amount. The 2008 buyer could have a 12% loss in home value and still have made as wise a purchasing decision as a buyer in 1971. The buyer in 2008 overpaid for the house compared to 1971 but saved money on the interest charges. An 11% loss in home value makes the 2008 buyer even with a buyer in 2001, and in better position than a buyer in 1991. At 9.5% interest on a 30 year mortgage, the 1991 buyer would pay 3 times the principal amount—a purchase no more attractive than buying in 2008 and suffering a 29% loss in value.
Negative home equity has locked many people in place, unable to refinance or sell. But low interest rates make the day of freedom closer than it would otherwise be. House prices will recover eventually, and recent home buyers have the consolation that they were not  unwise compared to buyers in the past.