Housing price update

According to the seasonally adjusted Case Shiller index, housing prices actually rose a bit (about 0.2%) in the first quarter of this year. According to the non-seasonally adjusted Radar Logic data, prices rose about 3%.

As the chart above suggests, the rate of decline in housing prices has moderated quite a bit in recent years.

Adjusted for inflation, the Case Shiller data for 10 large metropolitan areas shows that prices declined about 3% in the first quarter. Real home prices by this measure are still about 10% higher today than they were in 1990. But since the cost of a mortgage in 1990 was about two and a half times higher than it is today, and real disposable incomes have increased over 70% since 1990, housing prices are best thought of as being incredibly cheap.

This chart compares the rise in home prices as measured by Case Shiller, and the BLS' estimate of the rental equivalent of home prices has been. Housing prices and rents have come back into line.

All the evidence to date suggests that there has been a major pricing adjustment in the U.S. housing market, and that this has been sufficient to clear the market. Anecdotal reports from a number of areas in the country now suggest that activity and prices are beginning to pick up. While we may see a bit more softness in these indices before they turn up (bear in mind that they are produced with a lag of at least three months), prospective homebuyers would be wise to view the glass as half full rather than half empty (i.e., prices are more likely to be higher a few years hence than lower).