more housing market analysis

This article makes the valid point that housing prices are losing ground to inflation. However, house prices don't have to drop to take an enourmous amount of liquidity out of the market. Seven million houses sold last year times $225,000 equals 1.6 trillion, or 13% of GDP. There are probably as many houses as families in the U.S. or about 100 million. Every percentage point that housing prices drop takes 225 billion off household net worth balance sheets.

However, we do have to remember that this is America, the world engine of capitalism, innovation, and entrepreneurialism. Worker production and corporate profitibility are at record levels. During the last bubble the Nasdaq lost half of its value, and the Dow 30%, causing the 2001 recession. In my mind, the 2001 recession was extremely mild. This is a phenomenol loss for such a small recession, but I think the next one will be a little worse, considering that home prices affect consumer spending more directly than stock market gains. Much of those market gains were locked away in pensions, 401(k)'s and IRA's.