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09/23/2007: "US house prices: the world's 'Achilles heel' "

Previous posts have focused on the unprecedented boom in US house prices, as the source first of liquidity problems, then credit problems and eventually recession. America has been in denial. Read this very measured testimony to a Congressional Committee by Prof Shiller (creator of the house price index used on this site) to get a sense of the impending disaster in America. The rest of the world is always a party to any US recession but it also carries a lot of the dodgy loans on its own books - in banks, hedge funds and therefore indirectly in individual portfolios and corporate pension funds. When you look at the accompanying graph of real house prices (ie deflated by general inflation or relative to the prices of everythign else) remember that this is absolutely unprecedented in the US, where both land and building costs have been quite stable relative to prices generally since the 1950s. The bricks and mortar route to riches is a totally new popular myth in the US. To think the near 100% gain in real terms since the late 1980s would just conveniently level out, which even Fed Chairman Bernanke thought, was always nonsense.

Now that real prices are actually falling, denial is out. Many Americans are beginning to agree with Robert Shiller: "I am worried that the collapse of home prices might turn out to be the most severe since the Great Depression. It is difficult to predict the depth, duration and all of the consequences of such a decline operating in a much more complex modern economy."