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Housing price update

Drudge today reports that "Home prices tumble again," but that is a wild exaggeration. These charts help put things in the proper perspective: prices haven't dropped much at all in the past few years, but they are substantially lower today than they were at the peak of the market in 2006.

The Case Shiller home price index for August shows that average prices in the major 20 metropolitan markets are unchanged relative to where they were at the bottom of the recession in 2009 (top chart). On an inflation-adjusted basis (second chart), prices have fallen 40% from their 2006 highs, and are down about 6% relative to where they were at the bottom of the recession. In the top 10 markets (third chart), real housing prices today are about 15% higher than they were in late 1989, and about 50% higher than they were at the lows of 1997. This latter observation could support the claim that prices have not yet hit bottom, but I note that mortgage rates in 1997 were about double what they are today, and real personal incomes are 37% higher than they were in 1997—so today's housing prices are much more affordable than they were in 1997.

The case for a further sharp decline in housing prices is not obvious, in other words. But, you say, what if mortgage rates were to rise? Wouldn't that kill the housing market? Not likely, because mortgage rates would likely rise only if the economy were to strengthen and/or inflation were to rise, and that would mean much stronger demand for housing. Moreover, stronger housing demand in coming years would also likely collide with a dearth of new housing construction, thus creating very strong upward pricing pressures on housing.

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