The economy's core problem is the same today in 2010 as it was in 2005. Housing prices remain wildly overvalued relative to the fundamental market-forces which determine them.

The unforgiveable tragedy of the past two years is that prices would have continued to migrate towards sustainable levels had the Government not manipulated demand.

Not only have we lost valuable time during which the market would have been resolving the economy's problem, but we have made our dire situation even worse by financing 7+ million Government-subsidized mortgages on overvalued houses.

This forum has observed that there is no reason why the average house should be worth more today than it was prior to the Housing Bubble (adjusting for inflation). In fact, most economic fundamentals which determine housing prices are worse than in 1997 (with the exception of mortgage rates) making a credible case that valuations should fall below pre-bubble levels.

Presently unemployment, perception of risk, price trends, credit availability, subprime availability, demand for housing, inventory for sale, distressed transactions in the market and affordable mortgage availability are worse than in the mid-1990s.

Current mortgage rates are at record lows, but only because they are being directly and indirectly subsidized by the Government. If the private sector were underwriting mortgages based on risk, financing rates would be above pre-bubble levels.

The concept that prices should fall below January 1997 levels has been validated in individual markets nation-wide. The Case-Shiller Housing Price Indexes for Atlanta, Charlotte, Cleveland, Detroit, Las Vegas and Phoenix have all reverted below inflation-adjusted 1997 values.

The following charts show three versions of the Case-Shiller 10-City Price Index. They include:

• The Pre-bubble price index value adjusted for inflation
• Actual Case-Shiller index performance since the Housing Price Bubble began
• A theoretical index trend line (post March 2009) assuming that stimulus spending, monetary and fiscal policy were not used to prop up housing prices

The theoretical trend line is nothing more than a guess at what might have transpired during the past two years. But it is intuitively appealing given:

• The multi-year pace of price declines (following a consistent 9 year trend during the Bubble)
• The continued erosion of economic fundamentals (such as employment)
• The reality that prices today would still be above inflation adjusted, pre-bubble valuations even had they been allowed to continue their collapse

Recent home purchases have occurred at valuations potentially 20%+ above market-determined levels. Given that housing prices will fall towards sustainable values, the Government has manufactured an incremental source of wealth destruction and foreclosures.

The Federal Government has spent trillions of dollars over the past 24 months making the economic Depression longer-lived and more damaging.