No sign yet of a bottom in home prices

All of which has home builders feeling gloomier than at any time since their trade group began tracking sentiment 20 years ago. The National Association of Home Builders index fell in July to a record low of 16; a reading above 50 means builders are upbeat about the outlook.

Even if all the bad loans could be cleared out to the system quickly, and excess inventory of new homes were cut to more normal levels, housing prices still have to come down from the irrationally exuberant levels reached during the height of the housing bubble.

There are several ways to measure just how far prices have fallen so far, although each has its shortcomings.

The Realtors' monthly data on existing-home sales, which shows the median price down 6.1 percent in June from a year ago, only measures buying patterns for homes sold in a given month, which may not be comparable from year to year.

OFHEO, the federal regulator overseeing mortgage finance giants Freddie Mae and Fannie Mac, tracks prices changes for individual homes. The agency's House Price Index is down 4.8 percent nationwide for the year ended in May. But the index only covers loans under the $417,000 limit for Freddie- and Fannie-backed loans.

The S&P/Case-Shiller index, which also tracks sales of individual homes, shows home prices off 15.3 percent for the year ended in April. But that measure only tracks homes in 20 large metro areas.

As with all aspects of real estate, price trends vary widely based on location; national statistics tend to mask wide disparities in price moves. Prices that soared the highest fell the furthest. Based on the S&P/Case-Shiller index, prices in Las Vegas are down nearly 30 percent from their peak, while homes in Charlotte, N.C., have lost less than 5 percent of their value.

Regardless of how you measure the drop in prices, the fundamental question facing home buyers, sellers, lenders and investors is: When have prices fallen far enough to offset the outsized price gains from the buying frenzy of the housing bubble?

Analysts say there are several historical benchmarks that are useful in estimating just how far house prices got ahead of themselves — and just how far they need to fall to returns to “normal.”

Mark Vitner, an economist at Wachovia, recently looked at two historical benchmarks to determine how far out of whack prices got during the height of the bubble.

One was the ratio of home prices to personal income. Home prices surged in large part because of the artificial boost in home buying power as easy-money lending practices put more money in buyers' hands than they could afford to pay back. Now, housing prices are falling back to levels that better reflect the average per capita income needed sustain a home purchase.

The price to own a home also bears some relation to the cost of renting instead. From 1983 to 1998, the cost of owning and renting equivalent housing was pretty much the same. But by the time home prices peaked in 2006, buying a home cost as much as 40 percent more as renting a similar home.

Based on those historical comparisons, and current trends income growth and rental prices, Vitner figures the housing market will hit bottom sometime between mid-2009 and mid-2010. When they finally do hit bottom, he estimates prices nationwide will have fallen on average between 22 and 29 percent.

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