Worldwide depression or worse. October 2008 update.
Housing prices are looking to decline much further than was originally expected by HousingBottom.com a year ago. Basically, there are two possibilities for US economy and world economy for the next 5+ years:Depression (not just recession) lasting many years. That's the best-case scenario. Complete breakdown of banking and lending worldwide. That's the worst-case scenario. Depression scenario
Worldwide depression is the best-case scenario. World economies will gradually (and probably largely orderly) shrink over the next 5+ years. Think higher unemployment, people spend a lot less money, borrowing money is much harder, companies with high debt are going under.
Housing prices will re-price down to reflect this new reality. Probably by at least one-third down from "normal bottom" levels. So if the "normal bottom" of say $400K 2006 price condo in Miami were to be $150K in several years, that new "depression re-pricing" will bring it to $100K.
Breakdown of worldwide banking and lending scenario
Inflated housing leveraged by up to 1-60, then sold and repackaged into various unregulated financial instruments around the world created liabilities and future losses that WAY exceed all assets of banks, financial firms, or even governments. These 1-60 leveraged instruments will unwind over the next several years, and this unwinding may very well lead to complete breakdown of all worldwide finance as we knew it for the past 50 or so years.
The probability of this scenario is very real, certainly far from remote. It's impossible to predict exactly how this scenario will effect the world, but it's very likely assets will be re-priced to largely cash levels - how much cash someone can pay for a given asset without borrowing. This scenario will also probably lead to wars among countries as well as civil wars and a lot of unrest and violence in many countries, including the US and western Europe.