Highlighted stocks include D.R. Horton (DHI), PMI Group (PMI), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).

It was no surprise that the Case-Schiller index came out showing big year-over-year declines in housing prices, and that the declines were extremely widespread. The 18.5% decline in the 20-city average was just slightly worse than consensus projections of an 18.2% year-over-year decline. The 10-city composite, which is a subset of the 20 but which has a longer history, was down 19.2% on a year-over-year basis. From the peak, the 10-city composite is down 28.3% and the 20-city is down 27.0%.

So does this mean that we are close to the bottom? Well, we are closer than we were a few months ago, but things still have a way to go on the downside. Check out the graph below (larger version available at http://www.calculatedriskblog.com/). Over the long sweep of history, housing prices generally go up at about the same rate as the pace of inflation, or just a touch higher as incomes rise.

The rise from, say, 1997 to 2000 could have been explained as the index just catching up from a few below-par years. Everything after that was just a pure and simple bubble. There were no demographic changes that would explain it -- nothing but easy credit and momentum trading.

The value of houses over the long term has to be related to 2 things -- rents and incomes. As unemployment rises and hours are cut back, incomes are falling (not rising), and in real terms the median income has not risen so far this millennium.

Over the last decade, rents have increased generally in-line with overall inflation. There has been no large diversion between either the rent component, or the owners-equivalent rent component of the CPI and the overall CPI. Together, they are by far the largest portion of the overall CPI, so that is not a huge shock.

However, if the price of an asset continues to rise, and the cash flows that asset produces do not rise, there is going to be trouble brewing. It is the same thing as seeing a stock with flat earnings or slowly growing earnings year after year soar to the sky on just multiple expansion.