The National Association of Realtors today reported a 1.4 percent drop in U.S. median home prices for 2007, from $221,900 in 2006 to $218,900 in 2007. It was the first drop in national home prices in the 40 years that NAR has been surveying median home prices, according to MarketWatch.

“Although no hard data are available, most economists believe median home prices hadn't fallen since the Great Depression of the 1930s,” according to the MarketWatch story.

In its press release announcing the December numbers and 2007 numbers, NAR said home prices slowing the most in higher cost markets created a “downward distortion to the national median.”

And despite a 22 percent year-over-year drop in existing home sales in December, in the lead sentence of its press release, NAR touted “total sales in 2007 at the fifth highest on record.”

Home prices are closely tied to foreclosure activity (see graph), so this news from the industry bastion of optimism would indicate that foreclosures will continue at a high level into 2008. As home prices drop, homeowners in financial distress lose equity leverage to sell or refinance their homes to avoid foreclosure.

And at the risk of sounding like I’ve put NAR’s rose-colored glasses on, all this bad news for the market could be good news for contrarians — homebuyers who want to buy low and are willing to see their equity diminish in the short-term but come out way ahead in the long term, or investors who are able to buy properties low enough to either still flip for a profit (despite the sluggish market) or at least cash flow as rentals.