Housing prices on the rise

More evidence of the housing recovery: according to Case-Shiller, home prices rose over 12% in the year ending July, reaching a post-recession high in both real and nominal terms. However, prices are still 23% below their early 2006 peak in nominal terms, and 32% below their peak in real terms. Despite their recent rise, 30-yr fixed mortgage rates are still 25% below their 2006 average, which means that housing is still far more affordable today than it was seven years ago. 

The chart above is based on the seasonally adjusted version of the Case-Shiller Home Price Index. In inflation-adjusted terms, prices in July were the same as they were in June 2002. The real estate bubble inflated and deflated, and appears to be reflating once again.

The above chart uses the Case-Shiller index covering only 10 major housing markets, but extending back to 1987. The housing market appears to be embarking on yet another uptrend cycle, having survived two declines in the past quarter century. In real terms, homes today are selling for about 50% more than in 1987. However, back then 30-yr fixed rate mortgages carried an interest rate of about 9%, twice as high as today's rate.

This chart compares the BLS's estimate of the rental value of U.S. homes to the Case Shiller 10 index. BLS has been criticized for as long as I can remember for either understating or overstating housing prices and their contribution to inflation. Based on this chart it would appear that BLS is doing a fairly good job of tracking housing prices over time, while smoothing out the big ups and downs.

In recent months mortgage rates have jumped by about 1 full point, and home prices have risen. This has resulted in a significant decline in housing affordability. But as the chart above suggests, homes still remain affordable from a long-term historical perspective. Nevertheless, the big decline in affordability in recent months is likely to keep prices from surging in the months ahead; market forces—higher prices and higher mortgage rates—are starting to discipline a housing market that had probably gotten a bit frothy.