User profile: RealEstateEconomist

If you want to get an idea of whether current prices are close to the bottom, one indicator to look at is evaluating new housing supply in the pipeline that is coming to market in the next 6-12 months.

Add the 2008 land price plus the 2008 building costs. If the replacement costs are higher than comparable market prices, the current market prices are more likely than not to be stable. On the other hand, if new supply is coming on line at prices lower than current market prices, expect downward pressure on prices.

Land is being re-cycled through the system. Builders today, can buy land, build houses and sell them to consumers at prices 20-50% less than 2006 prices and still make a profit.

To get square footage costs for building check out
www.UsHousingMeltdown.org and look for the Replacement Cost Fundamental. You can select from four quality levels of construction. Basic, Tract, Custom and McMansion.

It's likely prices will drop till they reach 3 times income levels of the residents in the neighborhood.

During the boom, some areas reached ratio where home prices bubbled up to 10 to 1.

If you want to see what what happens to prices when they return to the historical ratio, check out the Home Price Ceiling fundamental at
www.UsHousingMeltdown.org just type in your zip code.

I found a home pricing tool that provides some insights to future home prices by indicating the top level and bottom level of prices for a particular property. The top or price Ceiling is the highest prices can be limited by the income levels of the zip-code. The bottom, or Floor is the lowest prices can be based on their ability to generate a yield from rental income. Check this out at www.UsHousingMeltdown.org Look for the Ceiling and Floor tools

So where are prices going to settle?

Home prices are re-aligning with the fundamentals.
Historically, home prices have been 2-4 times local income levels. This ratio makes sense when you realize that in normal times, sensible lenders will only allow a borrower to use a maximum of 28% of their income for mortgage payments and associated expenses. During the boom this ratio went up to 10 to 1 in some areas.

Now that lending standards have tightened, prices are being pushed down back to their historical ratio. What happens to prices? It depends on what the historical ratio was for the area before the bubble. There is a nifty tool at www.UsHousingMeltdown.org, the Ceiling tool,
where you can type in your zip-code and see the historical income to home price ratio and what happens prices when we return to the normal ratios. When prices go from 8 to 1 back to 3 to1 you're looking at a 60% price drop. Yikes!