But the leverage power that you get from investing/buying a home works both way, magnifying your percentage of potential return or loss. To make a statement of “home prices always go up in the long term” is just totally irresponsible. The only reason that it is true is because the inflation rate is always more than zero percentage in the long term. Obviously, inflation rate is positive because societies have gone away from gold standard to a fiat money system.

Now if we look at the most recent housing bubble occurred in Japan as an example, we will find that the prices have NOT recovered to the peak of 1991. In fact, prices in 6 largest cities have dropped 64% from 1991 to 2004. And interest rates have been cut to almost 0% and loan terms extended to 90 or 100 years without being able to stimulate the housing economy. If such declines in home prices can happen in a country where the lands on islands are the most precious commodity and population density is relatively high, then there is no reason that it cannot occur here in the United States.

While I don’t think US will follow the deflationary model of Japan, but rather Argentina’s inflationary track, housing market in nominal prices before adjusting for inflation is most likely to continue to fall towards 4th quarter of 2012. Certainly, my call on the bottom can be wrong, but at least I was intelligent enough to know that we are in the post-peak of housing environment back on August 4th 2006 (in the last paragraph of “Why Stock Markets Crash”).

My date of 4th quarter of 2012 is based on the following observations.