A sexy Montreal condo listed for $349,000 sells months later for $249,000. A Vancouver condo listed at $499,000 goes unloved until the price plops to $420,000. A small apartment building in Toronto goes on sale in April for $765,000 and sells in July for $598,000.

All around us now is the growing evidence of a great asset deflation taking place. And it’s only started. Days ago US Fed chairman Ben Bernanke said a double dip is entirely possible, “if home prices go down. Home prices, as best we can judge, have really flattened out in the last year.”

Is this a global phenomenon? After all, news is floating in of a real estate deflate in China, and I just received this interesting note from Jack, in a country with a bubble that may have surpassed ours:

I emailed you a few months ago asking for some investment advice as I thought I had sold my house in Australia. Was I ever naive! The whole deal fell through as the purchasers couldn’t get lenders mortgage insurance or muster up a 20% down payment. It has gotten considerably harder for people to get loans these days – which makes it considerably harder for people to sell their homes.

I am happy to say that I’ve been following your blog ever since and – since the local market is going through a housing correction/slump – I took your blog advice to Jane and slashed our asking price. As you say, anything can sell, it just needs to be priced right. So, to summarize:

– bought a beautiful acreage (1 hectare) in early 2008, built a house and moved in early 2009 – sunk ~$630,000 into the property
– interest rates rising, making payments higher on our $500,000 mortgage, stealing from my child’s education account to pay the bills…
– initially sold house for $583,000 in April 2010, financing fell through
– lost job (made redundant, “right-sized”) on July 1, 2010, no other job opportunities in my field of work (geotechnical engineer) in this town (Albany WA)
– sold house for $565,000 in July 2010 – financing to go through on 30 August (fingers crossed this time)

So as you can see, I’m taking a bit of a bath especially considering ~$25K of the above selling price goes to the realtor. Basically don’t give a crap about the loss, I’m just happy to get out with some equity. I must say that I even consider myself fortunate that this happened because when we were struggling to make payments and the first sale fell through my wife got upset and said that she would never buy a house again! It was an expensive lesson but worth every penny considering that her attitude has always been that owning a home makes life more secure. Sure, if you own a home, but we didn’t, the bank did. Security to me is the ability to move to where work is and not be tied down to an area because of a mortgage.

Back in the USA, new information on what happens when a housing boom turn to bust that every Canadian with a mortgage and little equity should know. According to a new study co-authored by Yale economist Robert Shiller, about 20% of American households are trapped in homes they cannot sell since they owe more than they own.

Of those 15 million, over 4 million families (28%) have a mortgage valued at least 50% greater than the market worth of their homes. So, imagine you bought a house in Vancouver two years ago and took a $600,000 mortgage, and now it’s worth $400,000. Obviously you cannot sell without writing a cheque for about $250,000, and you cannot even walk away – without being sued and declaring bankruptcy.

How could you have been so delusional as to buy and finance a home at the top of the market?

Today there’s $2.4 trillion in mortgage debt on houses in negative equity in the US, and of that. $771 billion is unsupported by real estate values. This money is lost, but has yet to be written off the books of the banks that made the loans. Millions of homeowners are forced to make payments on this debt despite the fact the principle will never be repaid, and it has turned into phantom financing.

This is why there’s more deflation to come south of us, with the inevitable consequence it will also spread here.

The American housing market, as mentioned before, has yet to hit bottom. Further price declines will increase the number of households underwater, and cause chaos in states like Nevada where already 80% of families are drowning. This is what Bernanke tosses over at night. Real estate Armageddon eroding middle class wealth and income, erasing consumer spending and business revenues, leading to more job loss, less demand for housing and a vicious spiral downward.

At some point, of course, it will stabilize. But the collateral damage will be breathtaking.

This is not about Nevada, however, or the Fed or America or Australia and China.

Rather, an aggressive asset deflation now taking place with its greatest manifestation in the thing we’ve poured the most money into – housing. Expect this to swell like a moist fungus, making fools of those who were in bidding wars ten months ago in Leslieville, opted for 35-year mortgages in Sherwood Park or stepped on to the virgin hardwood in new homes in Richmond they secured with 5% down.

For two years I have been urging you to divest real estate and invest in financial assets. A balanced basket of assets – market bonds, preferreds, sector ETFs – for income, growth, capital preservation, diversity. And survival.

Unlike those carcasses in the desert, you still have time.