Prominent measures of houseprices have been falling for some time and the declines have accel-erated recently, at least on a national basis. The price declines have boosted standard measures of housing affordability and have caught the attention of consumers, provoking increases in traffic of prospective buyers—the normal prelude to a pickup in home sales.

House prices are bound to remain under downward pressure for some time, considering the record level of vacant housing units already on the for-sale market as well as the large and growing numbers of foreclosed homes coming onto the markets. Some ­analysts argue that these pressures should be allowed to play out, generating a quick and decisive market-clearing decline in house prices that will boost sales and bring housing supply and demand back into balance in short order. But that’s an extremely high-risk path of adjustment. Public policy should take housing on an alternative path that will restore balance in an orderly fashion while minimizing further damage to the U.S. economy and to financial markets.

A widespread and unfettered fall in house prices has not occurred in the U.S. since the 1930s, and it’s difficult to sketch out the range of consequences. But it’s likely that this path of adjustment would inflict heavy damage on the economy and financial markets without actually reviving home sales or rebalancing housing supply and demand in a timely fashion.

For one thing, sharply falling house prices create expectations for further decline, causing many prospective buyers to retreat further into the bushes rather than pushing them into home purchases. Secondly, falling house prices take a heavy toll on the quality of mortgages that are secured by the existing stock of housing, a problem that’s already at crisis proportions. Declining quality means rising foreclosures, which add more homes to glutted housing markets and provoke tighter lending standards for households that might want to buy homes—effects that already are starkly evident in the markets.

Sharply falling house values also have serious spillover effects on the U.S. economy, including negative wealth ­effects on consumer spending. Even more important, declining prices can only ­intensify the dramatic flight to quality in national and global credit markets, a ­phenomenon that was triggered by the abrupt meltdown of the subprime mortgage market last year. Further retrenchment by the investment community will work against efforts by the Federal Reserve and foreign central banks to repair severely damaged credit systems, raising the prospects for national and global recession.

Public policy can help restore balance in housing markets without the dangers of rapid price declines. Temporary tax credits for buyers of new homes in inventory would quickly spur sales, reduce the inventory overhang, and provide support to home prices. Enhanced financing opportunities via the FHA, Fannie Mae, and Freddie Mac would be appropriate complementary policy initiatives, assuring affordable financing for buyers using tax credits as well as for other prospective home buyers.

This government-guided path of adjustment relies partly on the inevitable growth of population and households, as well as on household income growth, to restore affordability and bring housing supply and demand back into balance.