Editor's Note: This is the second part of a 2-part article. Part 1 can be found here.

I've written extensively about how stock market valuations are mean-reverting. We have a long way to go for valuations in terms of P/E ratio to get to the mean; typically, we see P/E ratios drop far below it.

It’s hard to see portfolio increases in such a mean reversion period. We're also watching housing values come down (see more below). What we’re going to see is a very difficult period for asset growth in precisely the 2 areas where investors tend to concentrate their portfolios: US stocks and housing.

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Housing: Are We at Bottom?

The short answer: No.

But let’s look at the data from one of the most knowledgeable sources on that topic: John Burns of John Burns Real Estate Consulting. Burns consults with over 2000 of the largest banks, homebuilders and hedge funds in the country. He has a reputation for solid research and pulling no punches, and is deeply involved in analyzing housing market trends. He graciously sent me the executive summary of his latest posting, from which the following is quoted:

“The prospects for the US housing market have changed for the worse. It has become increasingly clear that the U.S. economy is on the brink of recession, as overall job growth has slowed to zero and retailers are reporting abysmal results. New home sales, traffic and pricing are all heading down according to the results of our survey of over 300 builder executives. Resale [existing home] sales are starting to plateau in some markets, but pricing continues to fall as distressed sales dominate the market.

The new housing bill will help in some ways, but will first serve a devastating blow to homebuilders, with the elimination of seller-funded down payment assistance, which accounts for 17% of new home demand by one estimate.”

How far along are we? Burns thinks that home prices will drop by 22%, 12% of which has already occurred.