<p>Housing prices should be a function of average income but exotic financing pushed up housing prices to ridiculous levels. In the crash of the late 80s and early 90s, I saw real estate drop by 50%. The worst areas are Florida and California.</p>
<p>If average incomes continue to decline, then I would expect the same thing to happen to housing prices. The Fed desperately needs a reflation - the problem is in getting incomes higher. Right now, inflationary attempts are flowing into commodities which is squeezing consumers. The wipeout in the 80s and 90s was severe in my area and it had the right results. Prices declined, people saved, and there was less speculation. It paved the way for the boom years in the mid to late 1990s.</p>