The economic analysts have been talking a lot lately about deflation and the dangers it poses for our economy. I'd like to suggest we've been seeing deflation at work in the real estate market for a long time.

Deflation is when prices decrease. Economists are currently worried about a deflationary spiral where prices continue to decrease, consumers, knowing prices will decrease, wait for a better price, and so those with goods to sell are forced to discount their prices in an ever deepening loop. Of course, as goods are sold for less, the people who make those goods must decrease their costs, lay off people and creating more deflationary pressure.

We seem to be in this cycle in real estate and have been for some time. Buyers are waiting to see how much more home prices are going to drop. After all, no one wants to get a bad deal on one of the largest financial transactions they'll ever make!

And, so, sellers are forced to continue to drop prices. That reinforces buyers opinion that they should wait as prices are still dropping.

But, of course, ultimately this path leads to ruin, whether you're talking about real estate or the overall economy. If real estate assets continue to plummet in value, all of us are poorer. Even if you're not selling your house, you're impacted. Local governments are impacted as tax revenues fall. If you've got kids you know the schools are impacted.

So, how do deflationary spirals end? The problem is no one seems to have a good answer for that. Wars have ended them as the government created massive spending and hiring programs, as in World War II. Japan's tried everything you can imagine to end their deflation problem, without all that much luck.

President-elect Obama is about to get his crack at it. Let me say that one reason we're here is that we've had a government who did not believe that a deflationary spiral in real estate was possible. And, when they did, belatedly wake up, they still didn't believe that the effects of that would spill over into the rest of the economy.

The good news is that I believe that even the government now gets it. In one way or another I believe addressing this problem will be one of the first priorities for the new administration. I've got my fingers crossed that they get it right!