Prices Unhinged from Income Reality....

...Will Fall

(MONEY Magazine) - "Home sales are slowing. Condo prices are slipping. Sellers can't get their asking prices. And even real estate bulls are now waving the caution flag."

"If you're expecting a short-term gain, "you should be looking elsewhere," says Christopher Mayer, a Columbia University economics professor who not long ago argued that land shortages and rising populations would translate into ever-rising prices in "superstar" cities like New York and San Francisco."

"Clearly, it's time for a re-think, whether you're mulling over buying, selling, refinancing or remodeling a home or investment property. Or if you're just wondering, Is our house still worth what we think it is?"

"If you reside in one of the past decade's boom markets along the coasts or in the Southwest, brace yourself. Prices there were powered by two kinds of fuel: low interest rates and the willingness of buyers to pay up for the American dream."

That tank is almost empty.

"In Los Angeles today, the median dream goes for 10 times the median income. That's unsustainable no matter how creative banks are in coming up with new hybrid loans."

"Prices will flatten in most ex-boomtowns this year, and next year will be worse, says David Stiff, Fiserv's chief economist. "A lot of markets - particularly those where prices have increased dramatically compared with income - will see drops by late 2007," he says."

"The more unhinged prices are from local incomes, the more likely a fall."

"Since World War II, notes Stiff, the housing market and the economy have moved largely in sync. The caveat, of course, is that if the economy falters, housing will really start to look overvalued."

"So what do you do? If you've got a place you like, a mortgage you can handle and no plans to move or build a new wing, relax. But if you're active in the market, or you soon might be, rethinking is indeed in order."