Tip of the iceberg?

With every announcement of a write down, markets are pondering if we have reached bottom, but each time optimism builds up it gets swept away by some more bad news.

One serious problem that is likely to linger for a while is the housing recession. Prices, despite the crisis, still remain very high. Take the Case/Shiller national housing price index as an example. This very comprehensive index goes all the way back to the 1870's. If we take the average annual price increase over the whole period, it comes to slightly below 1% per annum. House prices really began skyrocketing towards the end of the 90's when they began to rise by around 8 to 9 percent per annum. All things considered, it is estimated that prices would have to drop by at least 25% for things to get back to normal. So far, since the crisis began, prices have dropped by about 8% on a national basis so there is still some distance to cover.

The erosion in home value will in time have an adverse effect on consumption, exacerbating the economic slowdown. That and further credit tightening will leave consumer with little reason to spend. Accomodative Fed policy and a fiscal stimulus package wont resolve the problem. On the contrary, they may make matters worse by fueling inflation as the latest CPI figures seem to be suggesting.