The bursting of the housing bubble is arguably the main factor behind the current recession. So it makes sense people would be checking the housing market and looking for a sign of reversal of the downward trend. Even back in 2007, BusinessWeek was already hoping for a reversal of fortune.

Last time I checked, it seemed the crunch would take longer than expected. Yet six months later there are signs prices are returning to where they should be. at least according to a housing affordability ratio based on median household income and median house prices.

Last data for the median household income from the Census Bureau is from 2007. Applying the nominal Home Price Index from S&P Case-Shiller (last data is for the 2008 Q4), and adjusting for inflation using the Consumer Price Index from BLS, we are reaching again the 3-3.5 range.

Median Home Price / Median Income

Median Home Price / Median Income

The question now is whether there will be a soft land or an overshoot, with prices drilling down the historical range. With the deepening recession, there is no reason for prices not to go beyond current bottoms, especially in specific markets. Detroit, for example.

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