In the process of researching the housing bubble, I've come accross several instructional charts and graphs. They basically speak for themselves, but I'll provide some additonal explanation. First and foremost, I'm a believer in the concept of 'reversion to mean'... more simply put, 'what goes up, must come down'. My advice is to study the graph first and then read the commentary. Hopefully that will answer any questions, but if you have more, feel free to reply to this post.

Inflation Adjusted Home Prices It's probably just a coincidence, but this graph bares a striking similarity with Al Gore's carbon emissions graph. Lately the numbers have skewed wildly from the mean. This is probably the most dramatic. If we revert to historical levels, the median home price would come in around $130K. (a nation wide drop of 35%)

I just threw this one in because I like the pretty colors. Expect these numbers to increase sharply in the coming months.

This next one is probably the most important, and the one that will provide the next 'surprise.' We're still early on in the subprime resets and there is a 'second wave' coming when the Option ARM's and Alt-A loans reset. A fair number of prime loans will continue to reset, and most of those properties will be 'upside down' by then. Option ARM's are the infamous loans that allow the borrower to make payments that don't even cover current interest due so principal owed can actually increase. Alt-A loans are their ill-conceived cousins that allow for loans based entirely on FICO scores and eliminate the tiresome chore of verifying income.

And finally, here is where those Option ARMs can be found.

What does this all mean? We're in for a lot more pain, and it won't be getting better any time soon. The financial problems are compiling on themselves. As home prices drop, lenders are requiring larger down payments, further reducing the number of buyers. As if all this isn't bad enough, we should have worked through all the subprime, alt-a and option ARM mess just in time for the retirement of the aging boomers (2011-2029) when they become net sellers of real estate. Your home never was meant to be your primary investment.  As you can see from the first graph, home prices have barely risen beyond inflation over the past 100+ years. It's only lately that they've become piggy banks to finance cars and vacations (and second homes). That party is over and the hangover has just begun.