The Great Real Estate Bust of 2008

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.

Why are we seeing such big price drops? And why does the housing market in so many other countries now reflect similar conditions? The answer has both proximate and underlying causes.