It’s been quite the week for residential real estate in Canada and the US. It makes you ask, what comes next?

As reported here yesterday, residential resales have dropped faster than Nicolas Sarkozy’s boxers. The sales numbers from Vancouver to Halifax were just awful and in some markets, striking. Most everywhere listings took a dive along with sales, showing many homeowners are in denial, while in cities like Toronto and Calgary high prices are proving as enduring as Justin Bieber. And did you hear about the jobs?

But this is not just a Canadian thingy, as you know. Asset deflation is an angry beast which now stalks the continent. Yesterday came news that nearly half of all the houses for sale in the US had price reductions in the last four weeks. Why? Because deflation means only people not paying attention actually buy things. Everyone else waits.

“Homebuyers this summer have been on the sidelines, waiting to find deals and bargains; so we’re seeing more sellers slashing their list prices to entice these home shoppers to make an offer,” said Leslie Tyler, vice president for ZipRealty, the company behind the report.

See what I mean? Lower prices bring expectations of further lower prices, which drives sellers to lower their prices in order to attract buyers, who wait because they know prices will be lower. Where does it stop?

Also yesterday the index of pending home sales (contracts signed, deal not closed yet) hit the lowest level ever in July. The beat the old record – set in June. This means buyer demand has crumbled since Washington stopped paying people to buy houses, which means prices can only go lower. There are 4 million houses for sale in the US, 19 million in negative equity, and 3.5 million families living in houses they have stopped making mortgage payments on.

This is deflation, which some people believe is foreplay for depression.

Could this happen here?

Not if you listen to the real estate apologists who have been crawling all over the MSM this week, trying to ameliorate the message.

“Listings are starting to move in a direction where the resale market is a little more in balance,” said BC economist Tsur Somerville. “The market has become more balanced following record monthly sales through most of the winter and early spring,” said Toronto Real Estate Board president Bill Johnston. “Misconceptions about the HST are having an effect on the market in both provinces (BC and Ontario),” said Phil Soper, president and chief executive of Royal LePage. “It’s not really that uncommon,” said Harry Janzen, of the Saskatoon Region Association of Realtors. “This slow-down is not all that surprising in the face of tighter mortgage regulations and rising interest rates,” says Sano Stante, incoming boss of the Calgary Real Estate Board.

Of course these are many of the same experts who claimed six months ago Canadian real estate sales and prices were on a mission. I well remember being tarred by a rabid band of realtors, dragged behind a chromed-up Silverado to a remote doggie pasture outside Calgary and being fed to fire ants (metaphorically) for suggesting in October that prices would be lower by 15% within a year. They dropped 5% in the last 30 days.

The point is that the fundamentals for residential real estate have turned negative and will stay that way. Variable-rate mortgages are more expensive, lending regs more restrictive, taxes rising, jobs elusive, the economy dodgy and households totally coked up on debt. Cheap money and dumbass experts helped propel prices to unaffordable levels. Now none of this is going to change quickly, which means there’s zero reason for the boom to rekindle.

But that’s not the big story. That part was inevitable, predictable, now laced with ennui.

What we must watch for is an American-style slide. Sales fall first, remember? The serious price reductions trail, and won’t be here until after Christmas. Anyone getting excited that a listing they’ve been following is 10% cheaper, and decides to buy, is going to lose an appendage. Like I said, mere foreplay. Stay tuned for the climax.

My odds of a neo-depression gripping the entire economy are still at 20%. The likelihood of a national real estate funk is 80%. Chances of asset deflation are 100%. And defrocked housing experts?