Goldman Sachs: U.S. housing overvalued by about 20%, Goldman Sachs says

I'll bet on the "plunging prices" scenario...

U.S. housing is overvalued by about 20%, based on historic relationships between monthly mortgage payments and median household incomes, Goldman Sachs chief economist Jan Hatzius said Tuesday.

"This overvaluation could eventually be unwound via a period of unchanged home prices with incomes rising," Hatzius said. Or it could be unwound by prices plunging, or interest rates falling enough to make houses affordable.

Hatzius found considerable regional variation, with housing in California and other hot markets overvalued by as much as 30% to 40%, while homes are fairly valued in much of the rest of the country, including Atlanta, Texas and Cleveland. The deterioration in housing is one reason Goldman predicts the Federal Reserve will stop raising rates at 5%.