That's the big question for many people. After all, it is the falling "paper value" of homes that have instigated much of the "paper wealth" destruction in the last 24 months.
Well, to answer this question, I've been doing some research. Here's a good rough way to calculate a likely stabilization point for home values:
When the median home price of an area is roughly three times the median income level of that same area.
This would mean the following:
If metro area X had a median income of $50,000 (roughly what the Census Bureau calculated for the U.S. in 2007) then the median home price for the same metro area should be no more than $150,000.
Sounds good and all, right? Well, Houston, we actually might have a big problem.
Why, you ask?
Because in 2007, with the 50k median income, the median nationwide home price was over $200,000 (note: all of these stats vary depending on specific regions of the country and further vary for specific localities within those regions).
Meaning that, the median income/median home price calculation is out of whack (a term not found in Black's Law Dictionary but which is clearly understood by most Americans) by a factor of at least 1.
But, you say, home prices have fallen a great deal since 2007. True.
Yet so has income.
Ultimately, the key will be for home prices to fall at a faster rate than income in order to reach that 3x ratio.
Hopefully that will be a shorter rather than longer time frame. And, even more hopefully we will reach that equilibrium of sorts at a higher income figure than lower one.
If not, the stabilization point of home prices will be well past the point of major fiscal discomfort.
