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Home price stability returns




The Case Shiller index of home prices in 20 major metropolitan areas (seasonally adjusted) has risen seven months in a row. Given the lags built into the way the index is calculated, this means that the bottom in U.S. home prices likely occurred last February or March, almost one year ago. In real terms, as shown in this chart, home prices haven't changed much at all since the end of 2008. Thus, stability has returned to a market that suffered from extraordinary volatile for many years. The popping of the housing bubble resulted in an almost catastrophic 35% decline in real home prices, which in turn caused trillions of dollars of mortgage- and asset-backed securities to evaporate, threatening the viability of the entire world's banking system.

Fortunately, the dust is continuing to settle, markets are clearing, and life goes on. The stabilization of home prices has allowed the prices of securities such as shown in the chart below to rise for the better part of the past year. That's because the panic which set in over a year ago caused such selling pressure that the prices of asset-backed securities fell to levels that implied a continuing decline in home prices that was way too pessimistic.

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