Where do things stand in the housing market? After two years of precipitous declines that have taken prices down almost 30% from the peak, house prices are finally approaching fair value -- which is perhaps 10% below today's level.
That doesn't mean that the price of your house will only fall another 10%, however. On the contrary, given the tendency for prices to overshoot after bubbles, it would be startling if house prices stopped at fair value. More likely, they'll drop at least 10% below fair value before they finally trough. Although the rate of decline is likely to ease over the coming months and years, therefore, prices will likely keep falling through at least 2011. And there's at least 20% downside left.
Why do I think so?
Because even after a 30% drop, national house prices are still above their long-term trend. Prices are also still high relative to rents and incomes, the two measures that are closest to the "price-earnings ratio" in the stock market.
Also, although many analysts are talking these days about housing "bottoming," it's unlikely that prices will stop falling once they get to their average levels (let alone start rising). The level of housing inventories nationwide -- the number of houses for sale relative to the number that are being bought -- is still high relative to the long-term average. Housing is as tied to the law of supply and demand as anything else, and as long as there's too much supply, prices will drop.
So ignore your real-estate agent when he or she tells you the recovery is right around the corner. It isn't. And in another two years, prices will likely be significantly lower than they are today.
If you'd like to see a series of charts that put the current housing data in a long-term context, please click here >
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