One of the first things a trader must learn is how to take losses. To have this knowledge makes the difference between modest failure vs. a slaughter.
When a trade goes against you, it's vital to see reality for what it is. The market may push prices back to a break even on your trade, but your hopes will never do so.
In the housing market, home buyers did not expect to take a loss when they bought. Indeed, the opposite is true. So now, many homeowners can't face reality about property values.
How do we know this? Because many homeowners continue to ask too much for their homes, even though residential real estate has been in a downward spiral for years:
"Homeowners, especially those who bought their houses after the real-estate bubble burst, are still having trouble accepting just how much the values of their properties may have fallen...Current sellers who bought their homes in 2007 or later...are overpricing their properties by an average of 14 percent."
New York Times, July 19
An overpriced listing will deter buyers even in a good housing market. Yet today's market includes an added risk: potential buyers expect even lower prices in the future. Here's EWI's Robert Prechter from the March 2011 Elliott Wave Theorist:
"In 2006, you could not talk people out of their property investments. I made a few speeches that year, and while attendees sometimes were receptive to my bearish case on stocks...they could not brook my prediction that real estate prices would fall a long way for years."
Home values are reportedly already down nearly 30 percent from their peak. And commercial real estate values have tumbled even further, down nearly 45 percent from their October 2007 peak (See chart below):
The July
Elliott Wave Theorist takes a detailed look at the "developing forces" of deflation. Indeed, Prechter says deflationary
"storm clouds" are gathering -- he identifies where the sky is turning the darkest.
Moreover, one of the many questions that Prechter poses is: "If the government wants higher home prices...why would Congress slash the profits of banks, which are a major engine of credit inflation?"