I don’t think there is anything magic about that particular red line. There are many methods one could use to define the average market. Some will move that red line up. Some will move that red line down.
However, nothing is going to move it up 2x. There is a range around that red line that is considered normal.
The most important thing to understand is that people’s preference for owning vs. renting did not change. People were, simply, speculating.
That is, they weren’t buying the house as a replacement for renting. They were buying a house because they thought it would be worth more later. This fueled others to do the same, which fueled others to do the same – and viola ! You have a bubble.
If you really want to look at people’s buy/rent preference, then doofrat’s link is the wrong link. What you really want is the first graph here, comparing home price growth vs. rent price growth:
To answer your question, I guess we could see people’s buy/rent preferences change, but that isn’t really what drove these prices up. Speculation drove prices up and now that people don’t expect the price to increase, the speculators are gone.
Furthermore, keep in mind that homes are purchased on credit. Easy credit allowed people with lower incomes to borrow more money. Another cause for the price/income chart. With credit drying up, that is another reason why it will come down.
Understanding the connection between housing and credit is just as important as income and rent.
