The upside to lower housing prices

Most of the problems with the economy stem from the lack of growth in disposable income. As housing prices climbed, people resorted to using crazy financing schemes to afford to live in houses because their incomes did not keep up with the cost of housing prices. That bubble had to pop and it popped hard, but there is a good side to it.

Lower prices mean that people can afford housing again. If incomes are not rising, the only way to have more disposable income is to lower other high fixed costs - like taxes or housing. As costs to purchase houses have come down, so have the costs of renting. This does not help people trying to sell or rent housing, but it does help people renting and helps people buying houses. Each of these people getting cheaper rents and cheaper housing gets more disposable income and this adds up. Normally, housing prices would rise to soak up some of that disposable income but housing is weak now and people aren't buying.

Higher housing prices cannot be sustained without having higher incomes.

There is some bad news in all this. Most of the foreclosures have been at the low end of the market. The banks are holding onto the higher priced properties hoping that prices will rebound so they do not have to sell at a loss. They are trying to prevent the collapse of the housing prices at the upper end of the market, but I think the prices at the upper end of the market have to collapse a bit before they fall back in line with the lower end of the housing market.

Will we have a mix of deflation and inflation? Deflation of housing costs with inflation of non-housing costs? It feels like it.