A recent report by Goldman Sachs mentioned in today's edition of The Wall Street Journal notes that "New York apartment prices are very high relative to the observable fundamentals," adding that "using three alternative yardsticks - price/rent, price/income, and affordability - we find that prices would need to decline by 35 percent to 44 percent to return to the valuation levels seen in the 1995-1999 period, before the start of the recent boom."

"The uncertain is substantial," the report cautioned, adding that "on the one hand, the picture would worsen further if per-capita incomes in Manhattan returned from the current level of 3 times the national norm toward the pre-1990s average of 2 times the national norm. On the other hand, it would brighten somewhat if jumbo mortgage rates converged toward conforming rates, perhaps because of a broadening of the Fed's support measures. In additional societal and democratic changes could also help, though these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn."

"If incomes fell back to the pre-1986 levels of 2 times the national average - and if national per capita income remained unchanged -prices," it continued, "would need to fall as much as 58 percent to return to the 1995-199 price income ratio. (The 58 percent drop is calculated as the 37 percent drop down in the table assuming constant income, plus the 33 percent drop in the per capita incomes, minus a term for negative compounding.)"

"So," the report asked, "is there any hope for the New York apartment market? Apart from a dramatic turnaround on in the city's economic fortunes, the most plausible story is a drop in jumbo mortgage rates. So far, jumbo rates have not benefited much from the recent decline in mortgage rates, but this could change if the Fed (presumably in conjunction with the Treasury) decided in the course of 2009 to broaden its support from the conforming market to the private-label mortgage market. To make an extreme assumption, if the jumbo mortgage rate fell from the current 7 percent to 5 percent, this would reduce the 'required' price decline from 35 percent to 19 percent. Of course, this assumes that affordability the only measure that matters for home prices and there is no role for the 'raw 'price/rent or price/income ratio and that Manhattan incomes stay at 3 times the national average. In addition, it could be that societal and democratic changes will keep a New York apartment valuations to be the levels that prevailed in earlier periods."