Let’s make one clarification of the question. When you say “what will happen to prices”, do you mean in real terms or nominal terms? That’s a vital distinction.
In real terms, houses are still overvalued, no question. Prices must fall in real terms, that is, adjusted for inflation.
But nominal terms, that’s anyone’s guess. Paulson and Bernanke are causing so much monetary inflation through all this that across the board price inflation is not unlikely. So maybe home prices will recover in nominal terms. We may see a 5% increase in home prices nominally, and the govt. will declare victory. Of course, if this comes at the price of gas and milk both hitting $10 a gallon, that 5% nominal gain will still represent a significant decline in real terms.
Or, of course there is always the massive flight from dollar, hyper-inflation scenario, in which case homes skyrocket to trillions of dollars and milk and gas jump to hudreds of millions of dollars. That’s quite a gain in nominal terms, but still a devastating loss in real terms…
