What inning is housing in? Looks like the 6th...

With all this talk about rising unemployment, Citi's bailout, Detroit's potential bailout, China's massive economic slowdown, Black Friday, and the dwindling credit card securitization market, it appears we have forgotten about THE root cause for our financial system meltdown: Housing.

Now I am not an economist and I can't run dozens of regression, time series and stochastic models. However, I can discern and listen to the really smart economists who want to enlighten and share their knowledge with the world (ie the economists that don't regularly go on CNBC/FOX ;-). My careful screening (or "leaching" if you want to be affectionate about it) has led me to some research courtesy of Calculated Risk that sheds light on where we stand in the current housing cycle. The report uses historical price to rent and price to income levels to identify exactly what inning we are in:

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably 60% to 70% complete as of Q3 2008 on a national basis. This ratio will probably continue to decline with some combination of falling prices, and perhaps, rising rents. The ratio may overshoot too.

Here is Calculated Risk's price to income metric:

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 15% or so. The further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes (Note: this uses nominal incomes, and even if real incomes are stagnant or declining, nominal incomes usually are rising).
Last quarter this index was over 1.25. Now it is close to 1.2. At this pace the index will hit 1.0 in Q3 2009. However, during a recession, nominal household median incomes are usually stagnate - so it might take even longer.

Here is additional housing deterioration information from Mish's Global Economic Trend Analysis (via Case Schiller data)
regarding where we stand and how much further is left to go:

The Case-Shiller numbers are for September 2008 which do not reflect any of the market meltdown. Price declines in excess of 10% are now occurring nearly everywhere, although the median dollar declines are only above $100,000 in those markets that experienced extreme price appreciation (CA, AZ, NV, FL). The trading in the futures markets continues to reflect nominal price declines for the next 2-3 years with prices plateauing afterwards (they only price out 60 months forward.