The Great Real Estate Bust of 2008

The boom that preceded the bust in 2008 in the world’s housing markets was caused by the faulty idea that investments in homes are a sure route to wealth. But people's belief can suddenly be disrupted if plainly visible events contradict it, and 2009 will shape up as a year of even more profound disenchantment.

NEW HAVEN – What brought on the collapse of home prices in 2008 that is the root of the financial crisis now enveloping much of the world?

Home prices in the United States, as measured by the Standard ampamp; Poor’s/Case-Shiller Home Price Indices, have plummeted more than 40% in real inflation-adjusted terms in some major cities since the peak around the beginning of 2006. Nationally, including all cities, the fall is over 25%.

The futures market at the Chicago Mercantile Exchange is now predicting declines of around 15% more before the prices bottom out in 2010. These are the market’s forecasts – and it is not a very liquid market. But those who make these forecasts are implying real declines, from peak to trough, of more than 50% in some places.

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