To be sure, Ireland had a mad building frenzy. The US also had a similar craze but of a refinancing variety. Going by the slow pace of property price drop, thanks to Obama's massive deficits, the prices will only hit bottom by the end of 2017. There's still a long way to go before we can see a real normal. Of course, reality will arise much sooner since the US government does not have that much stamina for sustained massive deficits.
With a new wave of foreclosures that is expected to set a more rapid pace than those of the past four years, house prices will be more depressed in 2012. Unlike in the past in which the subprime mortgages were the prime target, this time it's the ordinary mortgages that will be hit. In the fourth quarter of 2011, more than one in four homeowners were under water. Moreover, last year was the year in which proceedings were initiated and this year will be one in which settlement has been reached, allowing the banks to begin foreclosures. Sales of foreclosed homes will increase to 1.25 million this year from 1.0 million last year.
Because of the way it is calculated, the Case-Shiller index provides a pattern that is not distorted by short-term fickleness. Compare this with the US GDP growth for the fourth quarter of 2011 which registered a healthy quarterly annualised growth of 3%. Some commentators have stupidly claimed that recovery is in the pipeline. Although the GDP itself is saddled with quirky ways of computation, these are nothing compared to the ridiculous massaging of the annualised number.
Since almost 71% of the US GDP is made up of personal consumption, house prices do play a significant role in influencing GDP growth. Homeowners with substantial home equity as a result of the housing boom, used that equity to take on more debt loads. Now the process has reversed itself with homeowners paying back for the sins of their over indebted past. With home prices still struggling to pick up, it's little wonder that the household sector is not contributing to any growth. As for corporations, they are sitting on a large pile of cash, not rushing to invest in an environment with plenty of capacity to spare.
It's the nature of compound growth that it thrives on ever bigger numbers in subsequent periods. So for Obama to perk up the GDP, his deficit spending must keep on escalating. Many obstacles lie ahead at the end of 2012: expiry of Bush tax cuts, the $1.2 trillion automatic spending cuts and the end of the payroll tax cuts. All these will lead to a substantially reduced deficit.
Finally, if you want to crystal-gaze into the future, the following three charts (from The Economist) using decadal averages from the 1930s to the 2000s afford indisputable long-term trends. Of course, you may argue that the 2000s is the turning point after which all measures will pick up. But remember, this depression will turn out worse than the 1930s Great Depression, and the indicators so far have yet to plumb depths deeper than those of the 1930s. As the indicators start notching new record lows, prepare for a new reality that will upend politics and economics.