At present the overhang in inventories, both of new and existing homes suggests that prices will continue to fall. In the new homes market, builders have managed to reduce the number of unsold homes from 572k at the peak to 416k in July, but at past lows the number has dropped below 300k. The overhang of existing homes for sales has yet to fall, standing at 4.7 million, compared with less than 2.5 million in the 1998-2004 period. Some homeowners are probably reluctant to accept low offers but this may change if prices keep falling. The US Census Bureau also produces a series showing the proportion of houses empty and for sale. This has surged from its normal level under 2% of the housing stock to 2.8%, which translates into roughly 800k excess empty homes for sale.

Measures of valuation, such as the ratios of house prices to incomes or to rents, have already fallen significantly with the combination of declining prices and ongoing modest rises in incomes and rents. However, if the ratios are headed for the lows seen in 1997-8 there is around 20% still to go depending on which measure is used. On the positive side, it can be argued that lower interest rates mean that these ratios should be expected to run at higher levels than in the past. During the 1990s, 30 year mortgage rates varied mostly in the 7-9% range compared with about 6.5% now. The same monthly payment that will cover a 30 year mortgage at 8% will pay for roughly a 16% larger mortgage at a 6.5% mortgage rate.

However, over the next year or two, much will depend on expectations. If people believe, or fear, that home prices are going lower, they will be reluctant to buy, and sellers will continue to outweigh buyers. Just as home prices overshot on the upside they could overshoot on the downside and, since this bubble was far larger than past US bubbles, there is a risk that the overshoot is greater too. Expectations will depend partly on what is happening in the rest of the economy. Even on an optimistic scenario, however, the overhang of inventories points to further average declines of at least 10-15% on the Case-Shiller measure and a bottom not before late 2009. The more serious scenario is where the economy underperforms, unemployment rises much more than expected and a negative spiral of weak economic activity, weak home prices and worsening financial conditions sets in.