Central to the credit market turmoil that has dominated the news in the last two weeks is the future direction of housing prices. As it stands, prices are expected to move lower as bloated inventories of unsold homes are worked off. However, inventories remain huge and, in some parts of the country, continue to swell. Getting foreclosed homes off the market, particularly in California, Florida and Nevada, which have been hit extremely hard by foreclosures, will help to establish a floor under prices. Home price expectations and expected default rates of borrowers will go a long way in ultimately determining the value of all these ‘toxic' assets that are beating up banks' balance sheets at the present. As a result, arresting the sharp decline shown in the chart below, even reversing it sometime in the future, is crucial.


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