Two very similar stories about housing prices broke from both sides of the Atlantic just weeks apart: Mish reported today that US home prices fell by 5.9% in two months, and on October 7th the Telegraph reported that UK house prices fell by a record 3.6% in a month. In both cases, the timing appears to coincide with the withdrawal of fiscal stimulus – the home buyer tax credits in the US, and the tightening grip of the austerity measures of the new government in the UK.

This price action in US housing was anticipated on this blog in The Second Leg Down in US House Prices.

Yes, government policies temporarily stopped prices from finding their natural levels. Now that the tax credit has ended, and most mortgage mods are failing, the prior downtrend in price will now resume.

Temporary fiscal policies can not reverse bubble dynamics. Once the psychology is entrenched in the last stage where the bubble starts to deflate, matters have to run their natural course:

The classic psychological phases of a bubble. If these steep price declines marked the end of a Return to Normal, are we about to see Fear followed by Capitulation?

Dr Gary Shilling, in Mish’s post linked above, believes housing prices have much further to fall:

Excess inventories of 2.1 million are the “mortal enemy” of prices says Shilling. “A 20 percent decline would bring us back to the long-term trend, all the way back to 1890. I am a great believer in reversion to the norm”.

As for UK housing prices, the similarity of actual prices with the standard pattern of all bubbles is quite eerie.

Actual UK House Prices as at early 2009 were very similar to the generic chart of a bubble.

Is a second leg down in US and UK housing prices coming or under way? This is what the data apparently says.