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Home Prices Could Bottom Out in 2010

In this week’s cover story in BusinessWeek, several economists suggest that the housing market could get worse before it gets better. David Rosenberg, North American economist for Merrill Lynch, and Chris Flanagan, head of research in JP Morgan Chase’s asset-backed securities group, told BusinessWeek that home prices could drop 25 percent on average before bottoming out in 2010. The decline would return home values to their 2000 levels in inflation-adjusted terms and put the U.S. economy in an even bigger hole that it is now. The reason for the huge drop in prices, they add, is that the two forces that pushed up prices in the first place — lax lending standards and the conviction that housing is a fail-safe investment — are now working in reverse, which is depressing housing demand faster than homebuilders can cut back on supply.

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