That hissing noise you hear isn’t the air escaping from your child’s balloon – it’s the air escaping from the inflated housing market. After seven years of unprecedented inflation – prices increased 78 percent starting in 1999 – house prices are starting to deflate.

Why is this happening? How far will housing prices drop? Who will be harmed first by the drop? Will many Americans eventually be harmed, and will Mainers be among them?

Economists differ as to the reasons for the run-up in house prices. Some think that the increases were driven solely by market fundamentals: falling mortgage rates, easier mortgage terms, and rising land prices as urban populations grew. Others argue that speculation also contributed – speculators thought house prices would rise indefinitely, allowing them to buy safely at inflated prices and to sell later at even higher prices. Their purchases bolstered the price inflation.

For a year now, many analysts have considered the high prices unsustainable: Mortgage rates were increasing and prices were becoming unaffordable because they were rising much faster than average personal incomes. They also believed speculators’ optimism would eventually bump up against reality.

And indeed, since last spring, prices of all types of homes – new and existing single-family homes and condos – have dropped. New home prices have dropped the most: September prices were 18 percent below their April peak, according to the U.S. Census Bureau. Other indicators also point to a weaker market. October housing starts were down 27 percent from a year earlier, hitting their lowest level in six years, and there have been steady monthly drops in building permits issued.

How far will housing prices drop? Economists, as usual, have differing forecasts. Some predict the decline will be moderate and short – that is, we will have a “soft landing” -while others predict it will be steep and long-lasting, a “hard landing.”

Analysts who believe speculation played a big role in the price inflation tend to think the landing will be hard. Proponents of a soft landing note that, for every seller harmed by falling home prices, there is a buyer who benefits; they also argue that the basic human need for shelter may set a floor below which prices will not fall.

Three groups of people will be harmed directly and immediately even by a soft landing. First, some people who recently bought a high-priced house will find the house is worth less than their unpaid mortgage balance. Retirees with few assets are also vulnerable – 68 percent of U.S. households own their homes, and for most, the value of their house is nearly all of their nonpension retirement assets. Finally, people working in housing construction, real estate sales, building materials manufacturing, and mortgage banking are at risk of losing their jobs. Millions of Americans are in one of these groups.

Even a soft landing would harm additional Americans indirectly, and a hard landing could harm most Americans. The gross domestic product figures show how this could happen. The GDP data show that real residential construction spending has been dropping for the last four quarters. The decline was small at first, but it was 11 percent in the second quarter of this year and 17 percent in the third. The third quarter drop was enough to bring down overall GDP growth by one full percentage point, and this helps explain why GDP grew by only 1.6 percent in the third quarter, compared to 2.6 percent in the second.

GDP growth also will be hurt in another way: As homeowners see that their houses are worth less, they will spend more cautiously, cutting back on their consumption outlays.

So a weak housing market is already causing lower residential construction spending; is probably dampening consumption spending; and through both channels is reducing the growth rate of GDP.

Suppose we have a soft landing, and that construction and consumption spending stabilize soon. At the current diminished levels they will hurt future GDP, which will in turn dampen the growth of personal incomes and employment throughout the economy. So even with a soft landing, slow growth in personal incomes and employment indirectly will harm some people outside the three groups already mentioned. A hard landing, involving steep future declines in housing prices and sales, would hit personal income and employment harder, adversely affecting most Americans.

Is the Maine housing market as vulnerable as the markets in other states?

Housing prices are more likely to drop substantially if the previous boom was strong – and Maine’s boom was strong. During the five years before 2006, average house prices in Maine increased 62 percent, more than the 56 percent rise for the country as a whole. Only 15 states had bigger price increases than Maine. The increases for Bangor, Portland and Lewiston-Auburn were 55, 63 and 59 percent respectively.

So keep one ear tuned to that hissing sound, especially if your job depends on the housing market or if you plan to sell your house soon.

Edwin Dean, a seasonal resident of Vinalhaven, writes monthly about economic issues.