The housing bubble appears to be deflating

Talk of the day seems to be "the bubble is deflating - not popping"

OK, tell that to the guy who bought his no money down interest only no doc $800,000 condo in July - that it's now "deflated" a few percentage points - say 5%. Well, that's 40 large folks. Ouch...

There is mounting evidence that the speculative bubble in housing markets is deflating all across the United States.

Sales of existing homes retreated by 2.7 percent in October, and the decline was broad-based. Existing home sales dipped 2.5 percent, while condominium sales fell 4.4 percent.

Sales were down 6.5 percent in the Northeast, 7.2 percent in the Midwest, and 2.1 percent in the South, while they were flat in the West. The inventory of unsold homes rose 4.9 percent during the month, a new high for this business cycle.

Interestingly, prices have kept rising, with average prices up 16.6 percent compared to last October.

As painful as this may be, this slowdown in home sales is occurring in an orderly fashion so far. Mortgage rates and new applications for mortgages point to a continued and orderly slowdown through year-end.

Much of the slowing in home sales reflects the Federal Reserve's 300 basis point increase in the federal funds rate and the consequential increases in mortgage rates. The Fed has promised to continue to increase the funds rate, and must continue to do so to prevent the economy from overheating and the housing market bubble from bursting.

All of this suggests that we are having an orderly, if painful, slowdown in housing. A deflating of the bubble, not a bursting.