How far will home prices deteriorate?

Henry Blodget thinks he knows. If the post-World War II historical average is any clue – and home prices were amazingly static for the most part between 1945 and 1999 – then go ahead and shave another 30% or so off of home prices, according to Blodget.

Feed that data, then, into the mix when trying to value the residential mortgage-backed securities and collateralized debt obligations, and presto! You realize that banks and other financial institutions with exposure to this stuff are deep, deep underwater, more so than current valuations might represent.

My guess is that, to date, it has been the bankers and their lobbying minions who have kept plans (like the original TARP) to buy their rotten assets from coming to fruition. I would further guess that this perspective is premised on nothing but the pipedream that housing values will roar back to life in the not so distant future, a concept that Blodget rightfully lambastes.

We need to get over the idea that housing values are going to establish a new, higher plateau for valuation, like they did post-WWII. But even in that case, bear in mind that the higher valuations of that period followed the bust of the 1920s and 1930s that saw house prices erode by 40%. The post-WWII “reversion to mean” was merely the re-establishment of the pre-Great Depression valuation levels.

Further, if we continue to make lousy policy choices, there is ample historical evidence suggesting that house prices could fall well below the post-WWII figures, so even taking the historical mean could be vastly overestimating the prices of US homes, at least, for a good 10 years or so.