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Calculated Risk has a good post about home prices, looking at prices from several different angles. All angles suggest that prices have a ways further to go before reaching "normal." Of course, there's no reason to expect any time series to get back to normal, but it's a good first guess.

Why should housing prices be above their long-run normal ratio to something (rental rates, income)? 

  • Low interest rates are a good argument for asset prices of all types to be high, relative to rental income and household income.
  • There's maybe a tax argument. (If I own a house, I can finance my car with a deductible home equity line; if I'm a renter, my car interest is not deductible.)
  • Land scarcity with a rising population. I think that housing per se does not appreciate, but rather the land under the house appreciates. The exceptions would be in no-growth communities. 

In my judgment, that's too weak a foundation for today's home prices being as high as they are relative to the long-run norms. But I'd be happy to listen to other reasons.

Source: Housing on the Slide