The Case-Shiller index of house prices covers just 20 major metropolitan areas. It shows house prices down by 10.7% between January 2007 and 2008, but that largely reflects the fact that Los Angeles, San Diego and San Francisco account for 27.4% of the index.

In Fortune magazine’s March 17 interview, economist Paul Krugman says “We’re probably heading for $6 trillion or $7 trillion in capital losses in housing.”

Such estimates begin by assuming the S&P Case-Shiller index of house prices (which is now down 12.5% from its peak month) has a lot further to fall, and that it accurately represents the value of all real estate held by U.S. households throughout the 50 states.

The Federal Reserve’s Survey of Consumer Finances (updated with flow-of-funds data by David Malpass of Bear Stearns), shows U.S. real estate worth $22.5 trillion in the fourth quarter—up 2.5% from a year earlier and accounting for 31.2% of household wealth.

If you think the Case-Shiller index will eventually fall by 30% (Krugman said 25%), then 30% of $22.5 trillion would yield an estimate of $6–7 trillion capital losses “in housing.” But the $22.5 trillion is not just single-family homes—it includes commercial property, apartments and farm land. More important, even single-family housing wealth is not located in only 20 major metropolitan areas.

The Office of Federal Housing Oversight (OFHEO) index covers all 50 states, including nonmetropolitan areas, but not the most expensive homes (which is not where Case-Shiller finds the biggest declines). The OFHEO index shows house prices down 3% in January, compared with a year before. But even that average is by no means typical of all housing (much less real estate) in the entire nation.

Between the fourth quarters of 2006 and 2007, house prices rose in all but two of the many states excluded by Case-Shiller, and the increase averaged 3.8 percent.

Economists and journalists who use gloomy predictions about the Case-Shiller index to predict a comparable loss of real estate wealth are making several serious mistakes.