A new report from the brain trust at Capital Economics asks a question that stopped us short in the HousingWire newsroom.

Paul Diggle, property economist at Capital Economics, looked at several months worth of existing and new home sales, and made a simple but bracing observation:

"Given that existing home sales make up more than 90% of all home sales, a key question is whether the current slump will prove temporary or permanent."

Diggle goes on to consider various factors that could hurt sales. Most are well known but one no one looks enough at is housing prices. Combined with slowly rising rates, inflated home prices have reduced mortgage availability.

"The share of respondents to Fannie Mae’s monthly housing survey who think that now is a good time to buy a home dropped from 76% in May to 64% in November, while NAR’s index of buyer traffic declined from 72 to 53 between April and October," Diggle reports.

Whether housing is in a bubble depends on how a bubble is defined, of course, but there are some startling disparities in home prices and incomes.

The current spike in prices is not being driven by first-time homebuyers entering the market.

Homes are best priced relative to incomes, and that relationship is approaching 2007 bubble levels.

The median income today is about $51,000, while the median home price is $328,000. As noted in a post by Phoenix Capital Management, that means the average price is 6.4 times more than median incomes.

In 2007, when the bubble was its fattest, homes cost 6.8 times median incomes.

And while home prices have been rising (to the delight of real estate agents), incomes have been stagnant or declining. Median income today is close to levels seen in 1987.

Anthony Sanders, distinguished professor of real estate finance at George Mason University, has been sounding the alarm about this for a while.

"After decades of “affordable” housing policies from HUD and the Federal government, U.S. housing is now the most unaffordable that it even has been," he writes. "Note the decline in real median household income since peaking in 1999 and is now $5,000 lower (or 9% lower). Average U.S. house prices are, on the other hand, 68.4% higher today than in December 1999."

As Kerri Panchuk notes, it’s really hitting younger, would-be first-time buyers. They are either living at home with their parents, or else choosing to live in multifamily much longer than previous generations. It’s not because they want to but because they are priced out of home ownership.

The big driver of rising home prices has not been incomes or sales, but rather institutional investors buying up swathes of vacant properties which they turn into rentals.

That, along with an all-stops policy on the part of the Federal Reserve to keep liquidity in the market and interest rates suppressed have fueled what recovery we've seen.

"The simple reality is that there has really been very little actual recovery in housing. With five years of economic recovery now in the rear view mirror, it is clear that the average American is really not recovering as evidenced by the lowest level of home ownership since 1980," says Lance Roberts, at STA Wealth Management. "As I stated previously, the optimism over the housing recovery has gotten well ahead of the underlying fundamentals."

"While the belief was that the Government, and Fed's interventions would ignite the housing market creating a self-perpetuating recovery in the economy - it did not turn out that way. Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression," Roberts says. "Despite the Federal Reserve flooding the system with liquidity, suppressing interest rates and the current Administration's efforts to bailout banks and homeowners, owner occupied housing remains near its lows."

With no wage growth in the rearview mirror or ahead, interest rates ticking up, prices being artificially pumped up, and tepid job creation, it seems obvious that the only growth we’ve seen in housing has been illusory.

The housing "recovery" is on life support. What happens to the housing market when the plug gets pulled and all those programs end?