Will home prices fall too low in the short run?

As the housing bubble has deflated, during the first phase most of that loss was due to prices being too high relative to incomes or achievable rents. But as the economy has soured, home prices are now being pressured by higher unemployment rates, deflation and poor consumer confidence. The result? Prices could continue falling below their long-term mean, which could mean great deals for investors looking for properties which offer positive cash flow. From an L.A. Times story:

Southern California -- with home prices now at 2002 levels and falling -- is at the start of what is likely to be a long period of relatively affordable housing, economists and housing market analysts say.

Home prices are now below their historical average compared with incomes, putting them within reach of more people than they have been since about 2000, several studies show.

But that doesn't mean prices will stop falling soon, especially if jobs continue to vanish at their current pace.

After soaring during this decade's housing bubble, home prices recently fell back in line with what people earn -- and then kept falling...

Prices have now dipped below the level at which they'd be in line with the historical ratio of prices to incomes in California, said Christopher Thornberg, a Los Angeles economist who is principal of the consulting firm Beacon Economics.

Thornberg estimates the current median home value in California is $250,000. But wages are high enough -- and interest rates low enough -- that a median value of $290,000 would match historical norms, he said.

"If you're looking for a long-run opportunity, real estate is getting to that point," said Thornberg, who was an early predictor of the housing crash.

But it's not at that point yet...

Fearing for their jobs, many potential home buyers are putting off a purchase. Others simply can't buy anything because they are already out of work.

Thornberg forecasts that California home prices will fall until the middle of 2010, when they will begin to slowly creep up.

The local housing market is now in what economists call the "overshoot" stage, when a mid-priced home sells for less than it typically would based on median incomes. Even though homes become relatively affordable, the real estate market tends to linger for years at below-average prices as joblessness persists or buyers shy away...

Meanwhile, the affordability picture continues to improve. DataQuick reports the typical monthly mortgage payment Southern California buyers committed themselves to paying last month was $1,081, down from $1,239 the previous month and $1,940 a year ago. Adjusted for inflation, current payments are 51% below typical payments in the spring of 1989, the peak of the previous real estate cycle. They are 59.9% below the current cycle's peak in June 2006.