The drop in housing prices should bring more buyers.  But the facts are simple, the amount of sales are down slightly while the purchasing price is down substantially.  The housing market, in attempt to correct itself, is running prices lower and the amount of buyers is following.  This shows that the market is not yet balanced.  If it were, the drop in prices would bring a rise in sales.  The amount of home sales are down 2.5% from a year ago while the median home price has dropped by 5.7%.

What’s the reason for this disparity?  Its quite simple.  Sellers are unwilling to drop prices to the market price, instead willing to hold on until prices pick back up to their chosen price.  Many sellers have a set price and are unwilling to sell at a loss, this creates an artificial market floor because not all of the market participants (or any for that matter) are acting rationally.

The fact that prices have dropped 5.7% and the amount of home sales is down as well tells me that the housing market still has a very long way to fall.  In many markets prices were up 200-300% in just a few short years and only about 15% of that has been deflated.  Without any stimulus or Greenspan era rates, real estate prices are likely to continue their descent especially after the recent data.

To create an equilibrium demand for housing I think we’d have to see another 10-15% drop in prices across the board which would mean probably a few percentage points in most areas and huge drops along the coast an highly populated areas.  The Midwestern states probably have the least to lose but a few months on the market as those homes didn’t see much of a boost from the boom.  The coasts are going to lose it all, the amount of homeowners upside down is huge and the number of homeowners willing to sell is small.  Too many people are afraid to take a loss and unfortunately it will be something they’ll have to do.

Real estate should be at the bottom of your investment portfolio.  Its difficult to say whether we’re hitting a bottom or if there is still room to fall.  The events of the market have much more to do with prices than anything else.  Bernanke could screw the economy to throw a bone to the real estate market or he could pull a Volcker and save the economy while thrusting real estate to bottom bin investment grade.  Either way, proceed with caution.