August existing home sales inched slightly lower, home prices fell 0.6% from July due to the large share of foreclosure sales but the inventory of homes for sale dropped the equivalent of two weeks sales. The National Association of Realtors report showed an inventory drop for both single-family homes and condos.

Recovery is still months away. But with surplus inventory declining and more federal help for distressed homeowners on the way some regional housing markets have completed the price adjustment which is a necessary condition for recovery when buyer confidence improves.

Home prices in 18 states are not a barrier to an increase in home sales based on the Office of Federal Housing Enterprise Oversight repeat sales price index for the 2nd quarter of 2008. Since then, home prices in these states have dipped a little but not as much the 2.5%-3.0% decline in the national index.

The increase in home prices is less than (13 states) or equal (5 states) to the rise in income since 1998 before the national home price index began to rise much faster than income. All of these states are in the middle or southeastern part of the US. Except for Michigan, home prices have been rising slowly in these states in the last few years. Note that this group includes Texas, Georgia, North Carolina — three of the largest states with continuing rapid population growth.

Seven states, including the large housing markets in Illinois and South Carolina have home prices only slightly elevated relative to income. Note in the table that the recent home price trend is steady to only slightly down in these states.

Nine states, none among the major housing markets, have experienced home price gains clearly above income gains resulting in the recent erosion of home prices shown in the table. More price erosion will have to occur before a sustained rise in sales begins.

Sixteen states and Washington DC are experiencing rapid home price declines likely to continue well into 2009 before the ratio of home prices to income begins to approach the affordable range. This group includes many of the largest housing markets in the 2004-06 housing boom — California, Florida, New York, Arizona, Maryland, Virginia, New Jersey and Washington.

The huge price drops that occurred through last spring in California, Florida and Arizona still leave homes much overprices relative to income and remain a barrier to an increase in home sales once the ongoing surge of foreclosed home sales begins to subside.