PORT WASHINGTON, N.Y. (MarketWatch) -- Housing will revive when prices come down to the point where demand rises enough to reduce the huge supply of unsold homes now overhanging the market. That said, this point is a long way off.

Right now, there is at least a 10-month supply of unsold homes at current selling rates. This is twice the average for the nation as a whole. In some markets the supply is even larger.

As a consequence, few new homes are being built. The seasonally adjusted annual rate of new housing starts in the past two months was 1.21 million - two-thirds of last year's average and the smallest for any two-month period in recent memory.

Needless to say, this slowdown in new-home construction is taking its toll on builders, suppliers, labor and sellers of home furnishings, to name a few. And it's not too difficult to see the ripple effects on a wide variety of industries, from retailing to finance.

To whittle this supply to more normal levels, demand has to rise. That will happen when prices fall, since right now, housing prices are much too high relative to family incomes.

Today, median home prices are 3.5 times the size of median annual family incomes. This may be down from the recent peak of 4.2 times incomes reached last year, but it's way above the 2.8 times that home prices averaged during 1984-2000, when lots of homes were bought, sold and built.

And if you think 2.8 is low, check out the early 1970s. That was when home prices were only 2.3 times median family incomes, and housing was selling like gangbusters.

One major homebuilder recently proved that people will buy if the price is right. The firm slashed prices by 20-30% one recent weekend - and wound up selling more than nine times as many homes as it did on previous weekends.

To get prices back to 2.8 times family incomes would require a drop of 20% from today's levels - and this does not take into account interest rates and lending standards.

To equal the affordability of the early 1970s, prices would have to fall a whopping 38%.

Those who say such declines can't happen are ignoring how fast home prices rose in the first half of this decade. In most parts of the country, housing prices doubled during this five-year period while incomes went up only a fraction as much.

Sellers could always hold the line and wait for family incomes to rise. But this clearly won't happen overnight - and, besides, it's a buyer's market and no one wants to buy today knowing that prices might well be lower tomorrow.

After all, when it comes to housing prices, what matters most is not the cost of construction, nor what surrounding homes might be selling for. Simply put, it's affordability.

And until they are more affordable, houses won't sell.