This chart uses the data contained in Shiller's book "Irrational Exuberance." (HT: Mark Sadowski) It is an index of inflation-adjusted home prices using his methodology, and the last datapoint that is available is for Q4/08. Considering the lags in the way the index is measured and published, I've estimated, extrapolating from recent monthly housing price data and inflation data, what the value of the index is likely to be for Q2/09. This in turn is probably a decent guess as to where housing prices are currently. If we consider the period from 1950-1999, when the index averaged 112, to be relatively "normal," then current prices are only about 7% above normal. But considering that mortgage rates are now at all-time lows, and housing affordability by other measures is at or close to record highs, I think it's safe to say that the housing bubble has fully deflated. Housing prices are at or very close to levels that are reasonable—if not attractive—from an historical perspective and from an affordability perspective.
If it is indeed the case that we have seen all or almost all of the decline in housing prices, then this has very bullish implications for the economy and for financial markets. If home prices do not fall further (and indeed start to bounce, as suggested by my Inland Empire anecdote post) then we should begin to see that delinquency and foreclosure rates stop rising. This in turn will put an effective limit on the losses of banks, and it will greatly enhance the transparency and pricing of all the exotic mortgage-backed securities out there, potentially resulting in improved pricing for securities that are now distressed given fears of an ongoing decline in housing prices. The good news would quickly cascade upwards as confidence in banks returned. This crisis started with the collapse in housing prices, and putting finis to that tragic episode is an indispensable part of an eventual recovery.