Monday, July 31, 2006

Fears as US house prices to dip for the first time ever >>

Fears as US house prices to dip for the first time ever >> "HOUSE prices are set to drop in the US for the first time on record, US investment bank Goldman Sachs warned this weekend."

There have been declines in "real" prices before, as prices have stagnated thru periods of inflation. A decline in nominal price, however, would be huge.

The price of a house reflects expectations of price appreciation in the future. As housing prices rose in recent years, a snowball effect took over, creating a housing bubble: rising prices created an expectation of increased future appreciation, which in turn buoyed prices still higher, which in turn buoyed expectations higher, and so on. It is like looking into a mirror reflecting a mirror: instantly, there's infinite regress.

Normally, when a housing bubble is over, people, who own houses, get stubborn, and the volume of sales plummets, but prices stagnate. The only thing, which can force nominal prices down, is a wave of foreclosures -- forced sales by banks, who are not stubborn. A forecast of nominal price decline is equivalent to a forecast of massive foreclosure.

This is the beginning of what will surely be a painful recession in 2007.

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