Therefore, despite a perpetual "need" for housing, demand is shrinking and home prices are coming down. High levels of debt and a negative savings rate increase the apprehension among readers that we are in for a long tough market with prices continuing to fall and the number of foreclosures growing to make this housing boom/bust cycle more painful than in the past. Dino, one of my many detractors directed readers to this graph for a reality check.

One thing we see in the chart is that housing costs in real terms (inflation excluded), is significantly out of step with historical norms. So will housing retreat to the norm? Retreat? Yes. But all the way back to the mean? Not necessarily. For one thing, our population has risen 500% over the course of time. I do not believe the price of land, a large component of housing costs, is coming down at the same rate. Commodity prices (also up greatly) may come down, but global demand will remain higher than it has been historically as Asian and eastern European economies expand. Furthermore, acquiring the entitlements and permits to build is absolutely not coming down in price. It is only becoming more expensive.

So where is the bottom? If land, labor, materials and entitlements stay relatively constant at higher levels, than only the mortgage interest rates, energy prices (not likely to be be reduced greatly) and the speculation gap remain to be accounted for. The speculators are being hit in the first wave of price reductions and this will continue until they are wrung out of the system. Next will be the borrowers saddled with Option ARM's who have started to feel the pain. That pain will continue based on interest rate increases.

A few other recent views on housing and the economy:

Richard B. Hoey, chief economist and senior vice president of Mellon Financial Corporation, chief economist and chief investment strategist of The Dreyfus Corp. writes in, "Will a Housing Market Collapse Push the US Into Recession?" on Sept. 5, 2006, that he believes it is unlikely that weakness in the housing market will by itself stimulate a recession. He may not have all the feedback one gets at BloggingStocks.com

For a middle of the road view read Waiting for the Market to Tumble on Weakening Housing, Consumer Spending on Sept. 4, 2006 in Market Overview by Investing The Middle Way

These two and many other relevant stories cab be found at http://usmarket.seekingalpha.com/by/type/housing

To learn about Option ARMs, it is worth reading Business Week Online's report: "NIGHTMARE MORTGAGES They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung"

Still more related points of interest:

Since my original post, prices at the pump have come down about 5%. This may be a result of shifting demand, increased refining capacity, competing sources of energy, or for you conspiracy theorists, the oil companies and oil cartels adjusting our leash. Nonetheless, prices have come down and there are plenty of theories to support further reductions.

Interest rates have leveled off and there is some noise on "The Street" that they may come down more next year as the Federal Reserve Board contemplates shoring up the economy, which now seems to be staggering along.

If energy prices and interest rates come down, then perhaps the worst case economic scenarios will not materialize. If this happens the housing market will still adjust downward because of all the speculation that pumped up the "bubble," but it won't crash.

I was going through some old papers recently and came across an interest rate comparison matrix I made some years ago when we refinanced our home. It listed ten banks with the rates, points, fees and so forth. FYI the rates were from 7.75% to 8.25% for a 30 year fixed rate mortgage. This is considerably higher than the current rates. So the rates themselves are not high. The problem is that the point of entry into the housing market is too high and the Option ARMs first-time buyers are using to get in may be catastrophic for many people.

One other thing I touched on in Housing bubble, debt bubble or same thing? that caused controversy, at least for one exasperated reader, was my commentary on the potential for a recession triggered by China (See, Global recession? Not until after Beijing Summer Olympics). This reader was appalled by my position and questioned every aspect of my credibility because of it. My view is not unique, but was challenged by this commenter (my spelling corrected too) that felt the sources he trusted envisioned the possibility of a recession in China even earlier, prior to the Olympics in 2007. I stand my ground and look to 2009, afterward, for a potential recession. While there is everything in the making for it to come earlier, China has a tightly controlled form of market economy (not a true market economy) and it seems to me that they will do everything in their power to keep things going.

Finally, all the discussion about the cost of housing, and the more articles I read about modular, manufactured and prefabricated homes, makes me believe we should keep watching Warren Buffett for an always notable reality check. While America has been speculating in the housing market, he has been accumulating assets in manufactured home builders like Clayton Homes. Is he ahead of the curve again? I have no doubt!

Having been called an idiot and a moron, practical and intelligent, fair minded and biased, it is now apparent that if I write for a long enough period of time I will be called everything under the sun. Having only recently come to this new awareness, I still invite all of your comments, and in the end feel that my work is better for them and that all that read my posts and participate in the dialog have more to gain as well.

Disclosure: I am currently invested in numerous real estate investments, long and short term, as principal manager in some and limited partner in others. I am also invested in stocks, bonds and mutual funds. I have no position in any REIT's.

Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an Architecture & Planning firm.