“Price stability is more important to the government than a few million homeowners losing their jobs or homes. They must prevent inflation…”
You’re kidding, right? The APPEARANCE of price stability is important to the government, but ACTUAL price stability clearly is not a priority based on the evidence of the last decade. I agree with your conclusion that housing is toast. But there’s two issues: (1) How does one define “toast”? (In other words, what kind of decline qualifies as “toast”), and (2) What’s the timing of the toast? Two critical issues, I’d say.
My point is that the Fed/Government is prepared to pull all sorts of things out of its hat if it looks like things are really going south. Be prepared for bank regulatory agencies to change the stringency of their exams, a bailout of Fannie and/or Freddie, increased interest deductions for homeowners, you name it. I’m not saying it’s going to happen, I’m just saying to be prepared for the unexpected. Strange shit happens.
For example, as of 2003, in the 90 years the Fed had been in existence, it had NEVER lowered short-term rates below the rate of inflation (and for good reason). Consequently, using historical numbers, the odds of that eventuality were beyond a 3-sigma event – almost impossible. And yet it happened. Don’t be surprised if we see similar maneuvers. Ultimately, they won’t work – the fundamentals will eventually win out. But, such machinations can put a floor on the decline as well as deferring the pain out even further into the future than any reasonable person might expect.
