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Housing price update--still consolidating

This chart compares the Case Shiller index of housing prices in 20 metropolitan markets to the RadarLogic index of prices in 25 metropolitan markets (measured on a price per square foot basis). Both are doing a remarkable job of tracking each other, so it's unlikely that they are missing something important. And according to both, prices have been essentially flat for the past two years, after falling by about one-third from their 2006-2007 highs.

This next chart shows the Case Shiller index of 10 major markets, with data going back to 1987 and adjusted for inflation. Here we see that prices have fallen some 38% from their 2006 highs, and have lost a bit of ground in the past two years.

Considering that mortgage rates are now at all-time lows (down by about one-third from the levels that prevailed in 2006-2007), the effective cost of buying a house in the nation's large cities has plunged by almost 60% in the past five years. Taking into consideration that real median family incomes have been generally rising, while mortgage rates and housing prices have fallen significantly, houses have never been more affordable than they are today, as reflected in the chart below. (The most recent datapoint signifies that a family earning the median income has 176% of the amount needed to purchase a median-price resale home using conventional financing.)

The housing market has undergone the most painful and wrenching adjustment imaginable. Prices fell by an order of magnitude early in the crisis, but have managed to hold relatively steady for two years. The excess inventory of housing is declining daily, since new home construction today is only a fraction of the levels that have prevailed for many decades, and less than what would be needed to keep pace with new household formations. Perhaps the rebound in housing will take longer than many, including myself, have expected, but surely by now we can rule out another collapse, can't we? The next surprise in the housing market is likely to be a growth and rising price story, rather than another tragedy.

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