Housing price update

Today's release of the January Case Shiller Home Price Index confirms what we have known for most of the past year: home prices have been rising, following the bursting of the housing "bubble." The housing market is emerging from its worst calamity ever.

This chart compares the Case Shiller home price index to the one compiled by the folks at Radar Logic. Case Shiller is seasonally adjusted, but the Radar Logic series is not. Nevertheless, the two have been tracking each other nicely. Case Shiller reports that home prices have increased 8% over the past year, while the Radar Logic series shows a 12% increase. Split the difference: it's a safe bet that home prices have risen about 10% on average in the past year.

The housing "bubble" was caused by excessive demand, fueled by artificially cheap credit, which caused prices to rise to unsustainable levels and housing construction to create a significant excess inventory of homes. It took six years of sharply reduced new home construction and an approximately 40% decline in real home prices to "fix" this mess. Supply and demand for housing have come back into balance, though we are seeing signs that housing may now be in relative short supply, which is why prices are once again rising.

As home prices have fallen, rents have increased, with the result that prices and rents are now back to a more reasonable relationship. It's taken six years, but market forces have brought things back into balance.