With the expiration of the home tax credit we can now expect home prices to roll over and continue their downward trend. The question is: How much lower can they go before the market finally clears? As you can see from the chart above. nationwide home prices are currently hovering around $166,000, but this is very misleading because of the large fluctuations in regional home prices (West expensive, South and Midwest cheap). But it does show that in aggregate, home prices could fall to around $150,000 to get back within the historical norm. This would represent at least another 10% decline. This is likely a conservative estimate because post bubble prices usually overreact to the downside which could send nationwide prices into the $125,000-135,000 region. However, there is one key variable in the housing market, and that is interest rates. If rates increase even 100 bps, this could have a very negative effect on prices. Currently, rates are at historical lows of around 4.7% which is allowing people to afford more house than they would normally be able to purchase. If you look at a longer term chart of mortgage rates, you will see that they usually average between 6-8%. Since it is hard to see rates moving any lower (unless the Federal Reserve steps in), one would have to conclude that rates will eventually find their way back to the historical range. This should keep prices capped for an extended period of time as the market establishes an equilibrium.
One last thing to remember about the housing market is that there is no need to try to time the bottom. The housing market, unlike stocks or other asset classes, moves incredibly slowly. If you look at other boom/bust cycles in the housing market, you will see that once prices hit bottom, they usually stay there for a while and tread water (3-5 years). So don't believe the liars at the National Association of Realtors who claim that you have to "get in now" to get the best price. When it comes the housing market, patience is a virtue.