Today's Picture From the Big Picture Blog

I want to thank Steve Barry, a regular reader of the Big Picture Blog, who took the longterm Case Shiller chart dating all the way back to 1890 and then adding his own projected red dotted line showing how much further would need to fall 'til it hits the "median" of 100 (where Case Shiller started in 1890). Click here to read the post on The Big Picture Blog where this chart is discussed.

Most mainstream media show Case Shiller lines dating back 50 years and sometimes all the way back to the mid-1940s. Unfortunately, this truncates the view back into the late 1920s and the 1930s when this country suffered through the Great Depression.

Why is it important to look back to the Great Depression? Look at the chart. The Great Depression was one of those "outlier" Black Swan events which wasn't supposed to happen. In fact, the Federal Reserve was invented in 1917 with one of its purposes being to prevent Bank Runs and Depressions, seven of which this Country suffered through in the 1800s.

The Great Depression should be your starting point on the Case Shiller chart. Snap one end of a trendline through the lowest point (1921) then run the line out til it hits the next lowest point (1942 during WWII) then run that line out to where it bisects the right axis on this chart.

If you do this (use a ruler or any straight edge and hold up to the computer screen) the real trendline for Case Shiller bisects this chart on the right axis at an area between 75 and 80. And this sounds very right to me. Whereas Steve Barry is projecting a run to 100 and then a slow fade sideways (like Japan), I am thinking we could see much worse. I am looking for another 50% to 60% drop in housing prices, whereas Barry is looking for 35-40% more to the downside. That's a bold prediction, and I hope I'm wrong, but when I think about the highest unemployment in decades, the largest amount of food stamps recipients ever, the insolvent banks hiding bad paper through bailouts, the insolvent pension funds, the insolvent municipal, county and state governments, and I see record defaults on housing, record credit card defaults, tightening credit, etc. etc., I simply don't see a miraculous recovery happening for years to come.

People can't afford these homes at today's 50% off. We need another 50% off. Sellers had better get real.

Shadow inventory grows like kudzu. In Calfornia the majority of real estate sold today is foreclosed sales, each one tearing a new a-hole in the theory that "prices are bottoming."

Again, look long term.

If you don't use long term History, you are blind to what could happen. Norman Cousins the great TV writer once said, "History is a vast early warning system". Use the wide angle view. Don't think the unimaginable cannot happen. It has already happened. It happened before. Look at the past to see how dire consequences can be for those who bury their heads in the sand.

As always, Caveat Emptor,

Rock Trueblood