Despite early signs of a turn in the housing market, prices still have a long way to fall. In fact, we're probably only halfway there.

There's no perfect valuation metric for houses, but two measures--price-to-rent and price-to-income--are the best we know of. Asha Bangalore of Northern Trust provides recent charts of both, and a quick glance reveals how expensive house prices still are.

Price To Rent

Asha calculates the price-to-rent ratio using the Case-Shiller price index and the "Owner's Equivalent Rent" component of the CPI. The horizontal "means" in her chart are one standard deviation above the long term mean (i.e., they're not the average...they're a standard-deviation higher than the average*). The higher mean includes the high prices of the bubble years, and the lower one doesn't. Either way, it's clear that house prices are still well above their long-term average level relative to rents. (And don't forget that prices spend about half the time below the average).

Price To Income

Asha's price-to-income chart compares Case Shiller to Median Household Income:

The median price of an existing single- family home as a percentage of median disposable income rose to a record high of 469.5% in 2005, far above the median value of 337.9% during the history of this series (1968-2007) which includes the inflationary period of the later 1970s and the sharp increase in home prices seen in the first seven years of the current decade. Excluding the problematic period of the 1970s and the current decade, the median was 336.5%.

Conclusion

It's hard to say precisely how far house prices will drop and when they'll bottom. But based on these two valuation measures, combined with the rate of decline in house prices, it seems likely that house prices will fall for at least another year and at least as far as they have already (at least in inflation-adjusted terms).

See Also:

Case-Shiller Continues to Show Early Signs of a Turn

*Prices fall within one standard deviation of the mean about two-thirds of the time.