We keep hearing about positive signs month after month, but the latest data on the housing markets shows the pace of declines has been accelerating and widening, not slowing down.
In my opinion this is good. The decline in prices of overvalued assets is a good thing, whether houses, stocks or debt. The problem has been overvalued assets, the cure is lower valuations. it is uncomfortable (to say the least) if you hold those assets and assumed their prices would stay high, but the price of them staying high was huge. Decades of low returns, unstable asset markets from even more outrageous pricing levels (making the eventual correction even worse) an inability for savers to profitably put money to work without taking on enormous risk and housing prices straining the ability of consumers to rationally house themselves (and leading to a need for more debt to maintain standards of living.
This highlights that the amount of debt which will need to be written off or through government fiat (and lots of cash) magically made good is still nowhere near finished. My long standing estimate of 1.2 trillion in writedowns now looks positively quaint, when a year ago I was considered a fear mongerer. So far our government has deployed over 7.7 trillion to try and paper over this disaster. The ultimate likely losses from all manner of debt to financial intermediaries (whether or not they are recognized or disguised by the government balance sheet) is climbing way past 2 trillion and the ceiling on that number is very hard to confidently set:
“All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. Looking at the returns of the U.S. National Index, prices are back to where they were in early 2004. As of September 2008, the 10-City Composite is down 23.4% from its peak, the 20-City Composite is down 21.8% and the National Composite is down 21.0%.”
I still believe the Case-Shiller index will decline at least 35% peak to trough, and adjusted for inflation will bottom out around 50% from its all time peak before all is said and done. From Barry Ritholtz: