Housing prices need to fall yet further. From Calculated Risk:
After 2000, as the housing bubble inflated, the value of American homes (blue line) spiked in a way outside of historical bounds. At the same time, mortgage debt constituted a larger percentage part of the American GDP than ever before. The mismatch between the two of these indicates that for a time, the value of homes was rising faster than mortgage debt. But as the peak in the blue line shows, that is over now. The exponential growth in housing value peaked in 2006 and began reversing itself. But mortgage debt continued to grow in a classic overshoot pattern, as people continued to buy houses in expectation that housing would continue to grow in value. They did not, and instead went into freefall.
The little kink at the end of the blue line is the massive Federal intervention. Whether that represents a break in the trend, (like a falling climber who has caught himself mid-fall) or a temporary hickup remains to be seen. I favor the latter. While the graph seems to show that housing values have returned to something like historical normality, the mortgage debt load has not. To return to something like its historical norm, it would need to return to the level it was in 2000, at a little over forty percent. It is now running closer to eighty percent. Given that 50% of households have no mortgage debt, that means that 50% of mortgages are carrying a debt burden equal to 80% of our GDP.
Historically, the difference between the two data series has been about 45 percentage points. For all of recorded history. It is now running closer to 30%. God forbid the lines should ever cross. But with the 50% of households with no mortgage debt, it looks increasingly viable for homeowners underwater to default, starting the whole fire-sale process of housing price slides again.