This post is written as part of AOL Money & Finance's Best & Worst of 2006. Vote for it as the Money Story of the Year or check out the other nominees in the category.

The softening real estate market reminds me of the difference between a recession and a depression. If your neighbor loses a job, it's a recession; if you lose your job, it's a depression. Regarding real estate, if your neighbor's house goes into foreclosure it's a real estate recession; if your house goes into foreclosure it's a real estate depression.

Last week I saw strange people hanging out in front of the house across the street from mine. One of them told me he was an auctioneer; another said she was a real estate agent and the house was in foreclosure. Since we are not in danger of foreclosing on our house, by my previous definition, we are in a real estate recession.

The softening real estate market is a money story of the year because it's slowing down the economy. A leading home builder said we were in the worst housing market in 40 years. In October home prices fell nationally at a 3.5% annual rate -- the biggest year-over-year price decline on record. And homeowners used their homes as a source of cash -- withdrawing $800 billion in home equity in 2005. Therefore, a reversal in home prices could boost foreclosures, reduce consumer spending, and crimp consumer confidence. Moreover, every dollar spent on buying a new house is worth another $7 to $8 to the overall economy, from spatulas to fertilizer. So a decline in home building could lead to job losses in construction and its related industries.

I view the softening real estate market as a real estate recession -- if I can keep paying my mortgage, perhaps it won't become a depression. Regardless, it looks like things will be getting worse before they get better. I lived through a real estate slump in the late 1980s -- during which time my house lost about 15% of its value. This slump looks a lot worse to me.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College.

Best & Worst: Real estate market goes soft in 2006 originally appeared on BloggingStocks on Thu, 14 Dec 2006 18:00:00 EST. Please see our terms for use of feeds.