In his book Irrational Exuberance Prof. Robert J. Shiller (Yale-Economics) studied the U.S. stock market in historical terms. He noted that during every speculative bubble (housing, internet, 80s, 20s, etc) there has always been a widespread consensus that high valuations were justified by each market's "special circumstances." Well, many of us bought into those special circumstances and overpaid for our homes.
But how much did we over pay? Where is the bottom? How long will it take for home prices to stabilize?
Well, Shiller has provided an extensive data set (in Excel so you can play with it too) on his website that compiles the Census Bureau's historical housing prices going back to 1890 (and adjusted it for inflation so 1890 prices can be compared to 2008 prices).
I played with this data for a little while (and you should too just to double check my numbers). In 1890 home values had a inflation adjusted baseline value of "100" (and a nominal value of "3.5"). In the 4th quarter of 2008 home prices had a real value of 136 (nominal 139). Average real home values since 1890 are 104. Average real home values since the end of World War II are 119.
Assuming that the United States doesn't suffer a deflation this year, how far do housing prices have to drop in order to truly pop the bubble? In order for housing prices to stabilize at their post-World War II average they must decrease to their nominal 2003 levels. In order for housing prices to stabilize at their all-time historical average they must decrease to their nominal 2000 levels.
Which means that last after knocking $70,000 off of my seller's asking price, I'm doing well if housing prices stabilize at post World War II levels, but I overpaid by 25% if housing prices stabilize at their all-time historical levels.
Well, at least I don't live in Dubai.