In a CNBC interview today, banking analyst Meredith Whitney cautioned that home prices could drop another 25%. Her argument is based upon the fact that unemployment, currently at 10%, is now driving foreclosures and she doesn’t see it getting any better any time soon.

Meredith Whitney is a force to be reckoned with because she accurately predicted problems at Citigroup in October 2007, long before anyone else did. However, her current prediction seems a bit pessimistic even for me – and I’ve been a die hard housing bear.

Let’s start by looking at where Chicago housing prices have been. The graph below plots the Case Shiller index for Chicago (blue line) along side a trend line (red). That trend line was conservatively based upon the first 12 years of the historic data. As you can see the bubble took off in early 1999 and has actually dipped below the trend line in the last 6 months. In fact, we are currently 9% below the trend! On this basis Chicago homes are a bargain and not likely to drop much more. Also note that the index has turned up in the last couple of months.

Furthermore, let’s look at what trading in the Macroshares Major Metro Housing Up Shares is telling us about the future direction of housing prices. As of today this instrument is implying an 8.35% price increase between today and August 2014. OK…so in theory housing prices could still drop 25% in the short run and still end up 8.35% higher than they are now – but that’s a stretch.

One other thing to consider is that with all the money that has been pumped into the system over the last year or so we could be heading for some serious inflation. We’re already seeing the dollar drop and oil and gold prices surging. When inflation hits you want to be owning non-financial assets and owe lots of money that you can pay back with cheaper dollars.

Hmmm. Have I turned into a housing bull? I really don’t like sounding like all the other realtors but I have to call it like I see it.

Just a quick note to post a graphic from an old Crain’s article on the rent vs. buy gap in Chicago. As you can see below the gap was recently wide but it hasn’t always been that way. I wish they would update it.

Here are a couple of thoughts on what the future holds in light of the first time home buyer tax credit.

First, everyone should realize what the government apparently does not. Namely, there is no free lunch.  A lot of first time buyers have been pulled into the market recently with the promise of an $8,000 government giveaway. All halfway decent realtors are busy as hell right now taking care of these folks. There’s only one problem. These people would have eventually bought a house anyway. All the government succeeded in doing with their wealth redistribution agenda was to pull this demand forward by 6 months or so and create an artificial, temporary demand spike. But once the tax credit expires the natural housing demand will have been drained from the system and activity will plummet. Look for a long, cold winter in Chicago.

Second, with all these first time home buyers trying to get in under the wire, I’m worried that there will not be enough title processing capacity in the system to close all these deals before the deadline. Think of the last weekend of cash for clunkers (another flawed government scheme). So home buyers and sellers could find their closings pushed into December, which will be past the deadline for the tax credit.

In light of the above two considerations, my advice to buyers and sellers is try to get your deals signed by mid-October in order to allow plenty of time to schedule your closings. Any later than that and sellers could find themselves without buyers and buyers could find themselves short $8,000.