… we conclude that a decline in house prices is already under way. If the house market, like the stock market, were mean-reverting, the sell-off could carry a fair way. A return to the post-1968 trend line would imply a drop of 22%. Which, of course, for these real estate-centric United States, would imply disaster. We do not predict disaster, but we do expect a pullback severe enough to inhibit the leveraged American consumer and to stunt the growth of the U.S. economy—except for the Treasury-bond-buying branch of the economy, which will likely flourish.

What set of national causes could instigate a coast-to-coast bear house market today?

We submit three: wild and wooly mortgage finance; the propensity of market-determined prices to revert to the mean; and the tendency of flyaway real estate markets to become the drivers of economic expansion rather than the mere beneficiaries of growth derived from other sources.

- Grant’s Interest Rate Observer, Aug 11, 2006