Nice to see some corroboration from you, EmptySpaces, since you are far closer to the market than I am. It only makes sense that prices have to overshoot to the downside. Its a mean-reverting series, so overshoots in one direction have to be offset in the other, and buyers simply have no incentive to purchase an asset with 4-9 times leverage when prices are falling because of the loss of equity. This will only make sense when prices fall so low that investing for cash flow with modest leverage produces reasonable returns.

I do think we are headed for a Japan-like price deflation which is the usual aftermath of a major fall in leveraged asset prices and that this down cycle will be extremely bad.

Like increases, asset price declines tend to be self-reinforcing trends. The more illiquid the asset, the longer the trend. If stock markets have a 2 year down cycle after a major run-up (1973-1974, 2001-2003), housing seems likely to be down for 5-10 years (1988-1995).

If the banks continue to struggle with quarterly write-downs eliminating profits, credit will remain difficult to obtain for any but the most solid buyers.

On top of that, even when the bottom hits, it’s not going to bounce. Historically, when real estate goes down, it stays down for a quite a while. It does not move as fast as the stock market.