THE END IS NEAR

PORT WASHINGTON, N.Y. (MarketWatch) -- And now for some good news: The mother of all housing corrections appears to be nearing an end.
Nationwide, prices of new and existing homes are now only about 7% away from being as affordable as they were during the 1980s -- when the housing market was booming. At that time, median home prices equaled 2.9 times median household incomes.
To put this in perspective, at the apex of the bubble back in 2006, median home prices sold for about 4.5 times median incomes. In some markets they were actually twice as high -- clearly an unstable level that required creative lending and a bubble mentality among buyers and bankers alike.
For this key ratio to fall this far this fast required a combination of rising incomes -- and sharply falling housing prices. During the past three years personal incomes rose a total of 10% while home prices dropped by some 23%, on average.
This implies that by the time home prices bottom out, they will have fallen a total of 30% from their 2006 highs. In those markets where housing really got overheated, prices are already down by as much as 50%!
When combined with today's ultra-low mortgage rates, homes in many parts of the country may already be as affordable as they were in the halcyon days of the 1980s. Don't forget, in some areas home prices never bubbled up in the first place, so they have been priced right all along.
All that is needed now is a good dose of buyer confidence -- and a willingness on the part of the banks to resume lending to those who qualify for a mortgage.
Needless to say, unlike their counterparts of the bubble era, today's home buyers will be required to have some skin in the game. In other words, they will have to put down 20% or more. They will be required to document their incomes and be sure that the home they wish to buy is appraised at a realistic price.
From a seller's perspective, homes that are priced realistically (say, 30% off their peaks, or in some cases not more than three times local incomes) will sell the quickest. Keep in mind that even at these seemingly depressed levels, most houses will still fetch prices well above what they were in 2000.
Another piece of good news is that once housing prices touch bottom, it follows that the value of mortgage-backed securities will materialize as well. This is the sine qua non for thawing out the financial markets, for it will make the banks confident enough to resume lending -- first to each other, then to business and finally to consumers.
And once money begins circulating throughout the economy, many businesses will revive; they will stop firing and start hiring. For their part, consumers will resume spending -- which, in case you did not notice, now accounts for 70% of our gross domestic product.
So the Obama administration may not have to devise another plan to fix the economy. It could well be on the way to mending itself.

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