In the U.S., the Case-Schiller Index recorded declines for the three-month average ending September in 18 out of 20 major cities, and in the UK, house prices in October registered their biggest one-month drop since February 2009, according to an official index, which noted widespread price declines, falling in eight of 10 regions.

These developments should not be a surprise to readers, as they were anticipated here in the posts Second Leg Down for US and UK Housing Prices? which was published about a month ago, and in The Second Leg Down in US Housing Prices which was published almost three months ago.

The picture below, which illustrates nicely all the psychological phases of all bubbles and manias, is a useful guide to what is going on:

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

It is interesting to compare the chart above to this picture of the Case-Schiller Index published by the Calculated Risk blog which summed up thus:

Prices are now falling – and falling just about everywhere. And it appears there are more price declines coming (based on inventory levels and anecdotal reports).

Is Fear knocking on the door? We should know soon. Two and a half months ago, in The Chances of a Double Dip, I quoted Dr Gary Shilling who reasoned that any large demand shocks to the global system, such as from Europe imploding, U.S. commercial real estate crashing or from China nosediving while trying to fight off inflation, would each be sufficient in themselves to upset the weak US growth and cause a second leg down in the Great Recession. Arguably, all three of these negative developments are ongoing to a greater or lesser extent. A second leg down in the global recession in the current setting is a one-way street to a second leg down in housing – and the onset of Fear.