When a driver taps the brakes of a car, it slows down but remains under control. The workings of an economy are not so simple. If the economy decelerates in response to a spike in oil prices, for example, the slowdown may trigger a reaction that further impedes its progress. On occasion, the subsequent reaction can cause the economy to stall or land in a ditch.

For the past two years, economists have been concerned about the national housing market, which has been sliding because of weakening economic growth, unaffordable homes, and turmoil in the credit markets. Since 2005, U.S. home sales have declined about 25 percent, while the average home price has fallen about 4 percent. The slump in home sales has put a brake on homebuilding, reducing housing starts to 1.2 million from 2.1 million in 2005.

While the impact of the housing downturn on homebuilders, real estate agents and mortgage lenders hurts, analysts fear that the sector's problems will also put a brake on consumers, who account for twothirds of the economy. In the worst-case scenario, slowing job and income growth coupled with losses in home equity because of falling home prices will dampen personal spending, pulling the economy into recession.

How did we get into this fix? And what does it mean for the Puget Sound economy? There are no simple answers.

As economic forecasters, we typically put little stock in the psychology of economic behavior. We do not include, for example, an index of consumer confidence in our retail sales forecasting equations. Because consumer confidence largely reflects current economic conditions, as indicated by such things as the unemployment rate, we find that it is often a redundant variable. But to explain the current difficulties in the housing and financial markets and the fretting over consumers, we must examine the mental state of the economy.

From a national perspective, easy credit, an expanding economy and investors shifting out of stocks after the dot-com crash created the ideal climate for a thriving housing market. After increasing 7 percent annually over a fouryear period, the home price appreciation rate accelerated to 13 percent at the end of 2003.

Instead of cooling off the housing market, the jump in home prices unleashed various kinds of speculative behavior, such as homeflipping by investors out to make a quick buck and lending by financial institutions to borrowers with little or no credit, the socalled subprime mortgage market. What these speculators had in common was an expectation - a bet, if you will - that home prices would continue to escalate. While speculation helped boost prices for another two years, it was also setting up the housing market for a fall.

The U.S. housing market began to collapse in early 2006. After prices rose 26 percent over a two-year period, homes became much less affordable, leading to a downturn in sales, a softening of prices and a cutback in construction. The weaker economy and the prospect of smaller gains in home equity made consumers more cautious.

Then came a more troubling development. Attempting to reduce exposure from defaults, mortgage lenders had packaged their loans and sold them in the securities market. As defaults on those mortgages rose, uncertainty grew about the real value of the mortgage- backed securities, leading to a virtual halt in the trading of them. At one point banks refused to lend to each other except at very high interest rates out of concern that the borrowers might be overexposed to bad mortgage loans. There was even talk that the fear of lending might spread into other arenas, such as auto sales.