As we enter the summer season, green shoots are appearing all over the economic landscape. Yet among these shoots, weeds are growing as well. Will the weeds choke off the new growth? One way to know for sure is to keep your eyes on housing prices, where they go so goes the economy.

Intuitively that should make sense because it was housing prices that first got us into this mess. Recall that as homeowners with sub-prime mortgages couldn’t make their monthly payments they were forced to put their homes up for sale. As more and more homes went on the block prices began to fall. When no buyers appeared, home prices began a free fall as owner after owner went into foreclosure. It was vicious circle that soon found its way to Wall Street, the ultimate owners of these mortgage loans. The rest is history, a history which has yet to be resolved.

So why are housing prices so crucial, because you, my dear reader, as a home owner and consumer, hold the power to grow the economy or crush it. Putting aside your losses in the markets for the moment, when your largest asset drops in price by 30-40 or in some states 50% from its peak how does that make you feel? I’m guessing that you feel a lot less wealthy. As such, I don’t want to spend very much and will certainly refrain from borrowing additional money.

Now that attitude spells bad news for a whole host of businesses. Homebuilders, already struggling under a glut of unsold homes, certainly aren’t going to be building more homes nor will they be hiring any more carpenters, plumbers or buying new excavation equipment. By some estimates an average of 19 homes a day are being built around the country. Just imagine the competition among hundreds of local, state as well as the 10 largest national builders to build those precious nineteen.

Financial institutions, especially your local firms whose bread and butter are mortgage, auto and small business lending, feel the pinch as well. But wait a minute, you say, what about all those green shoots we keep hearing about?

Sales of new homes in May, according to the Commerce Department were essentially flat (-0.6%) and were actually up in April while the backlog of unsold homes fell. On the surface, that’s great news but statistics can be deceiving and downright confusing, especially when looking at and comparing monthly data. In contrast, The National Association of Realtors, for example, said this week that the median sale price of an existing single family home in May was 16% lower than last year while prices of new home were down by 3.4% versus 2008.

We also need to recognize the Obama Effect on housing sales and prices. The Administration’s first time home buyer $8,000 tax credit (which expires in November of this year) and the Federal Reserve’s strenuous effort to keep mortgage rates low are impacting home buyer demographics over the short term. Much of the recently-reported strength in housing starts, I believe, is a result of desperate builders trying to cash in on a rush of first time home buyers before the end of the year by putting up cheap starter homes.

Anecdotal evidence in Berkshire and Columbia County indicates the same thing. I know at least three families (all young, first time home buyers) in my area who have purchased homes recently, in Colonie, N.Y., Cheshire and Adams, MA. .One broker, showing my wife and I a higher priced home in Richmond, MA., admitted that “homes around $150,000-$185,000 are selling but the rest of the market is still slow and those higher priced houses that are moving sell at deep discounts.”

Business Week in a cover story last week forecasted that “home prices may keep falling for the next year, then stabilize and rebound with the economy.” The writers were hoping that by 2012 “we may finally get back to blissful boredom” meaning that housing prices will resume their normal cycle.

In the meantime, if prices continue to fall moderately, say another 5% or so, most economists think the economy can weather that rate of decline. If prices fall further (toward 12%) then more and more homeowners (roughly 4 million more Americans) would find themselves in difficult circumstances where the prices of their homes would be below their mortgages. Their access to refinancing or home equity borrowing would be severely curtailed and would also raise the risk of foreclosure or default.

So let’s hope that doesn’t occur and that housing prices begin to bottom over the next six months. I still think the odds of that are fairly high but you can bet I will be watching and hope you will be too.