Out of Whack: House Prices and Disposable Income
Over the last decade or so, residential real estate got way out of whack in relation to disposable personal income. If lending standards return to the stricter ways forged from the last great deflation, it is difficult to see how this ratio can avoid falling at least to the range of the early to mid 1990s. Given the historic tendency of markets to overshoot, a return to the 120 range or below could easily occur. The old maxim says that the likely depth of the fall must be considered in relation to the mania that attended the rise. This is tricky because "real" values might decline while "nominal" values stabilize, which is dependent on the overall rate of inflation.