How low can prices go? There are a number of factors to consider. First, house prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Second, house prices remain above rents and incomes, which, as discussed above, often serve as long-run anchors for prices. … Third, econometric models show that house prices increased during 2000–06 to a greater degree than can be explained by either short-run driving forces or long-run relationships: the corrections thus far have not erased all of the excesses generated by the house price increases.That leads to an uncomfortable conclusion: house prices in many countries still have room to fall.
The four-page paper is well worth the read, and references a fantastic article that the New York Times Magazine published in 2006, “This Very, Very Old House” by Russell Shorto on a housing index which is nearly 400 years old.