What Must Happen Before Real Estate Crash Ends?

Three years ago, the housing bubble burst. That set the stage for a pullback in new-home construction and consumer spending as home sales and prices began to fall. Many believe that at best we are only half way through the ‘housing correction’.
In spite of what you may have read or heard about the “unprecedented” decline in home prices, normal housing prices are still beyond the horizon. We are expecting to see many of the larger markets to bottom in 2010. There after we expect to experience a 3-5 year plateau before appreciation returns.
Here is why…
According to the latest data from the Census Bureau and the National Association of Realtors, median home prices in July equaled 3.6 times median household incomes. This may be down from the peak of four times incomes set back in 2005, but it is still far above the 2.9 times of the 1980s — when housing was more affordable and sales and construction grew at a steady pace.In the halcyon days of the early 1970s, when home sales and construction were at their peaks both in absolute terms and relative to the size of the population, the ratio of home prices to incomes was less than 2.5.
To get back to the average of the 1980s, home prices would have to fall another 20%, on average. Add another 10 percentage points decline for housing to be as affordable as it was in the 1970s.Of course, these ratios could be reached through a rise in household incomes. But this would take much longer, since incomes are growing less than 2% per year these days, owing to the drop in employment and the inability of workers to secure raises.
Simply put, the first step on the road to recovery is lower housing prices. We will know when they are low enough to be affordable when sales pick up and the inventory of unsold homes begins to decline.