Owner's equivalent rents (the denominator of the price-to-rent ratio) have increased by roughly 13% since 2006, driven in part by the increase in home foreclosures.

Indeed, increased home foreclosures (up nearly 25% since the fourth quarter of 2005) have forced prior homeowners into the rental market, placing upward demand on rental space, while causing the price of listed homes to decline.

As a consequence, bargain hunters are likely to have in part helped stabilize prices. Moving forward, demand for rental space may help reduce the existing stock of current inventories. Yet given the shift from renting to owning, an expansion of the available rental stock (multifamily units, in particular) is necessary to prevent a sharp rise in rental costs.

The improvements in valuations, together with historically low mortgage rates, have boosted homebuyer affordability to near record highs. Indeed, the National Association of Realtors Homebuyer Affordability index (which begins in 1986) reached an all-time record high in November 2011, driven in part by the sharp drop in home values. What's more, real disposable incomes per capita have also improved marginally, up more than 3% since 2006, contributing in some part as well to the improvement in affordability.

Actions taken by policymakers to improve financial conditions (and thus keep interest rates low) have also contributed to the improvement in affordability (Chart 3). Specifically, the combination of asset purchases from the Federal Reserve and safe-haven demand for U.S. Treasuries are likely among the key driving forces keeping interest rates low.

Mortgage rates hit record lows of 3.92% in early January 2012, down nearly 114 basis points from the recent peak in February 2011, while the Fed has added nearly $950 billion worth of long-term securities to its balance sheet since late 2008 in an attempt to improve financial conditions and increase lending.

Still, the rub is that not everyone who wants a loan can get one. While banks have loosened standards for some loans, the most recent survey of senior loan officer by the Fed indicates that credit conditions still remain tight.