One of my favorite things Greenspan said last week was that all the debt individual consumers are piling up is OK because the value of their homes is going up so fast that it all balances out.

Wonder what he'll say when the bubble bursts?

Greenspan actually said that? He really has become a shill for Dubya. If you can point to the out-of-whack on-paper value of real estate as something we can count on, and if you can do that only four years since a gigantic asset-price bubble burst in another market, you're either stupid (which he isn't), not paying attention (which he does), or lying.

I'm not clear on the chart; is that household income ( incomes linked by bank to mortgage payments)compared to house price?
I bought a house in San Diego in 1978 for 2.5 times married/dual income; 2X after 20% down. After a divorce it was a ratio of 3X.
The homes in my area run 600K+, and the two incomes are around 150K+ : ratio of 4X, 3X with 20% down.
It can be sustained if everybody is working at good jobs. Everyone isn't, and refinancing has given everyone "free" money. I could have $200K with no change to anything but the duration of my loan.
I understand that Greenspan actually recommended people getting variable rate loans. In these times, with a lot of people overextended, with the fixed at an extremely appealing rate - I mean, isn't that when fixed is right? He sets everyone up?
If I was a conspiracy person I would be going nuts right now with wild economic plans for the coming churn.

I find that chart troubling, and do not deny that speculative ardor contributes to housing prices in some parts of the country, I also worry that the chart could be highly misleading.

The incomes which should be tracked are those who are eligible homeowners -- i.e., the bottom 30-40% should be excluded. Not sure if average incomes of the homeowner cohort have fallen as fast (relative to home value) as this chart suggests, because of rising income disparities between the poor and the rest of society. If we must include the full spectrum or earners, than rents should also be included in the price metric, or, at least, selling prices of multi-unit rental housing, assuming that this is at least roughly a function of expected rent levels.

Also, the home price central tendency tracked should be median, not mean, because tremendous outlier pricing in a small number of markets would have a distorting effect on average.

Finally, we do need to factor in the degree to which prices have increased because the housing pool is actually more valuable. A typical new construction single-family home these days is over (sometimes WAY over) 3,000 square feet. Large swaths of core cities which used to be distressed, full of underused industrial space and run-down apartments renting for a few hundred dollars a month, have been converted into high quality, occupant-owned housing selling for mid-six-figures.

Correction to Richard W. Crews statement: "refinancing has given everyone "free" money."

Uhm, no, only to homeowners.

And Matthew Dundon:
"Finally, we do need to factor in the degree to which prices have increased because the housing pool is actually more valuable."

Be careful about that; you may price yourself out of what "new" buyers can afford; the only people able to afford your "more valuable" home might be those with "more valuable homes" themselves who likely won't be interested in yours.

If that occurs, a lot of that "value" might well dissappear when it comes time to sell.