The main factors:

Government Spending and Consumer Confidence:

The previous recession of 2001 was caused by a bursting of the dot com bubble. Due to this, people in the United States lost a large amount of wealth in stock markets that was created during the boom period of 1990s.

In January, I received some flak from readers when I wrote that home prices should either stabilize or recover in this year.

Five months later, I did a survey of home prices in a few places in New Jersey, California, Florida and New York using sampling and discussions with people I know there.

By December 2006, living in New Jersey started giving me the same feeling as living in an emerging economy (of which I have first hand experience): High home prices, high interest rates, high gas prices and high property taxes were leading to low disposable incomes. Poor retail sales were resulting in many retailers barely covering their employee and rental costs.

After I used the historical data for home prices for my previous article in January, in which I concluded that home prices will stabilize or recover this year, I tried to study gold prices.

(By the way, a month after that article was published, we saw positive news in the housing market this year).

I have been following the real estate prices of New Jersey for a long time. Based on memory and based on the feedback I received from previous home owners, I estimated that the real-estate in New Jersey has been going up at a rate of around 7% per year between 1945 -2000. This translates to doubling of home prices every 10-12 years.

However, the real estate went up over 120% between 2000 and 2005. One could give any reason for the increase in prices, like low interest rates, over-leverage, sub-prime loans etc. My own analysis trying to link the growth in the density of population in New Jersey with the price rise did not reach anywhere.

Currencies are adjusted based on the inflation of a country. The higher the inflation, the lower a country’s currency moves. However, the way inflation is measured from one country to another country is not the same. Some countries use Wholesale Price Index, others use Consumer Price Index. The index itself is composed of commodities and things that differ from country to country.

However, if inflation is about the cost of living, it should also include the cost of real estate.

Mr. Ben Bernanke gave a speech on housing trouble in NY on the 5th of May in which he conveyed that the Fed would recommend / encourage banks to reduce principle amounts from those mortgages where the chances of a property going into foreclosure is high.

In a way, this was anyway going on previously through the hedge funds. Hedge funds buy underperforming mortgages from banks at 40-50 cents a dollar. After this, they negotiate with home owners and offer them to reduce their principle in return for regular payments on time.