Money was lent to people with no down payment, no equity, and no documentation. Homes were build to sell to people on these absurd terms. Banks invested in asset-backed securities that were based on ridiculous mortgages.

Now the chickens have come home to roost. The bad credit risks are being expelled from the homes they could never afford in the first place. This produces a glut of homes on the market, which forces prices down in certain areas.

However, don’t give up on residential real estate and sell the family mansion just yet. Mr. Obama is coming to the rescue with massive spending that will probably be followed by massive inflation. Now I lived for many happy years in Brazil during a time when inflation was never less than 20%. The happiest people during an inflation are those owing unadjusted debt and holding real estate. The reason is simple: you never really have to pay off a long-term debt in inflation. Creditors are wiped out. The cost of construction keeps going up and so does the value of your home.

About the current price level of US homes, one thing you should consider when looking at the long term trend is the SIZE of the homes today, compared to homes, say, thirty years ago. A large part of the so-called housing bubble that appears on secular graphs is simply due to the fact that homes are getting bigger and better.

Also, the price of a home also includes the price of the land. In the current crisis, we see that the fall in real estate prices has not at all been equal across the country. There is a study on this blog that suggests that the disparity of the land component in real estate prices from region to region will result in greater variations in price in a down market.

The big question now, in my mind, about the real estate situation is how long Mr. Obama will remain if office. If he’s in power for eight years, following current policies, we might be in for a Depression, like FDR, followed by violent inflation. However, if he’s kicked out in four years, inflation will come sooner and perhaps not be as violent.

But in either case, it seems to me that we have inflation somewhere in the future. This means, hold onto your long-term non-indexed debt and real assets and eventually, you’ll be better off. Of course, if Obama is in office for eight years, many will no longer be employed and won’t be able to hang on until better times.

Fortunately, we now have term limits and won’t have to face FDR style economic policies for 16 years or more.

Why the concept about real estate is different from really happen