Years ago, when talk of an epic housing bust was considered looney-bin stuff, we predicted that deflation would cause home prices in the U.S. to fall by at least 70 percent.  With prices roughly halfway there, there is no change in our outlook. But the question remains as to how the real estate market will eventually find a bottom. The following scenario seems entirely plausible to us. It was written by one of the smartest guys we know, a Colorado-based financial advisor who has done very well for his clients over the last several, extremely challenging, years.  With the wealthy shouldering most of the burden, here is how our friend thinks home prices eventually will be made to “clear” in the marketplace:

“Short sale” has always been tough to explain to investors. First you borrow the stock, then you sell it. But now we have a much more easily understood concept, as it applies to housing transactions. The proceeds of the sale come up short of the amount owed, so you get to stiff the lender. And the Treasury Department endorses it. Seems simple enough. But wait; weren’t they just trying to prevent foreclosure? Well, fear not. This isn’t foreclosure. This is deed in lieu, lease in lieu, or emergency program in lieu of foreclosure. One must assume that the original “mortgage modification” program carried with it the expectation that the economy could catch up to the problems of insufficient » Read the full article