Home Prices Are Not Done Falling
Most Americans are wondering if home prices have bottomed out or if they will continue to fall. The obvious answer is that they will continue to fall, and that answer comes from two important (and simple) pieces of data.
The first is a comparison of median home price to median income. Everyone’s numbers differ slightly, but most analysts agree that the median home currently costs 3.4 years income. In the relatively prosperous years between 1980 and 2000, that number fluctuated between 2.9 and 3.1 years. Housing prices will have to fall another 10% just to hit the top of that range. Unfortunately, these are not relatively prosperous years and we can only expect them to get worse. As a result, we should expect home prices to drop below 2.9 years income.
The second important number is the median home price, adjusted for inflation. Take a look at this chart from Housing Bubble Graphs:
Looking at this chart, it seems clear that home prices have to fall more than 10% to meet historical norms. Of course, if the government loses control of inflation nominal home prices will skyrocket — even as real home values continue to fall.
