If real housing prices had followed inflation through July 2008, they would have been 27% below their actual values in July 2008. In other words, as of July 2008 housing prices had 27% more to fall in order to reach the real value they had for several years prior to the “bubble.” To put it yet another way, as of July 2008, the house price decline was not yet even half way complete.Mulligan looked at the 10 years prior to January, 2000 and figured out the rate of growth in home prices. He found that they basically tracked inflation. He did the same thing for the OFHEO index. I went ahead and did the same for single family existing home sales. The graph is below. The red line shows the baseline case, i.e. what would have happened if housing had continued to increase at its previous rate. Instead you can see what happened.
In October, 2005 actual home values were more than $55,000 higher than the baseline projections. The spread was similarly wide in July, 2006 and at a few other times. Interestingly, the prices are fairly close now and suggest that prices only need to fall about 5% to reach the baseline case. This differs from the Case-Shiller index for a couple of reasons. First, this number excludes condos and multi-unit dwellings and looks at the relatively more stable single family housing market. And second, this is a national number as opposed to targeting a number of the hardest hit metro areas, like San Diego and Miami. Thus this series is not as "frothy." Having said that, for most people this measure might be comforting since it doesn't look like prices will have to fall that much more, at least for a lot of homeowners.
I generally won't focus on current economic conditions on this blog, but recent events in the housing, financial, and credit markets do have important long-run implications for the future health of our economy and our ability to create new jobs and new innovations.
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