Are house prices back to normal?

There’s been some good-ish news on the housing front the past couple of days. First, the National Association of Realtors said that existing-home sales rose 5.1% in February from January (the caveat is that 40-45% of those were distressed sales). Today, the Federal Housing Finance Agency (FHFA) is saying (PDF) that home prices were up 1.7% in January compared with December—the first month-over-month uptick in a year. Now, that number is prone to revision (December originally showed an increase, too, but that was later wiped away), and year-over-year prices are still off by 6.3%—and significantly more so if you look at other (PDF) measures of home price. Still, a little ray of sunshine.

To help decide exactly how excited we should be, I took a look at this chart from the FHFA release:

Home-value-wise, we’re now back to early 2005 levels. Yay?

Well, that chart also says that house prices have grown at a compound annual growth rate (CAGR) of 4.0% since January 1991. Assuming I correctly used the CAGR formula I found online, inflation over that same period of time grew at 2.5%. So, if we think that house prices should basically move in line with inflation—and there are reasons to think that should be the case—then we’re still overvalued.

Barbara!

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

plukasiak

So, if we think that house prices should basically move in line with inflation—and there are reasons to think that should be the case—then we’re still overvalued.
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while I think we’re still over-valued, I don’t see why home prices should show much of a relationship to inflation for the following reasons:
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1) the size of the average single family home increased over the last 20 years, as has the size of the lot itself — and the amenities available in the average home. This adds upward pressure on home prices.
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2) median income has barely kept up with the rate of inflation… certainly not the 1.5% over inflation for the last 20 years that housing prices have increased. This should have created downward pressure on home prices– but because of “creative” mortgage practices, and ridiculously low interest rates, the lack of significant real growth in wages did not restrain home prices.
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my guess is that the “good news” isn’t really that good — what we’re seeing is more “distressed” home sales of higher priced homes.
mbirchmeier

I’ve got to agree with pluk, I still think we’re overvalued, but I see a handful of factors pushing home prices slightly higher than the rate of inflation.
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I think this is just a small plateau for people allowing those that are planning on jumping in the next 3-6 months, to just go ahead and bit the bullet. Home prices are likely to stagnate or go up a bit if nothing else because of the first time home buyer tax credit. Perhaps this is just existing home buyers moving before the market becomes flooded with people with ‘free money’.
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Either way I still don’t think we’ve seen the bottom, only a blip.
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-MBirchmeier
dotybj

Barbara, have you looked at housing prices in relation to rents and/or income? Seems like the “spreads” would expand with the loosening of credit and the zeitgeist belief that houses are a good investment, and shrink when those two factors reverse. Where are we now with respect to long term history? I would love to see a similar historical plot.
roughplay

It is all about supply and demand like any other market.

We have a lot of supply and the demand has been weak. Lack of demand is mostly caused by lack of credit available. However, credit is available for lower cost housing and the supply is shrinking. Once jumbo loans free up you will see the market clean up in 12 to 18 months. We are already seeing stabilization of prices in the hardest hit areas.

How long will these prices not increase. Just look at the population curve and you will see a constant increase in people turning 30 for the next 15+ years. With a lack of building going on right now we will have another boom but with better standards for lending.

Real-estate is all in local markets and even can be different from neighborhood to neighborhood. I know small areas even in California where all time highs are being hit right now.

If you want to flip you will not make money right now. Prices have dropped a lot quicker than rents so if you can cash flow and hold there is a lot of money to be made. If you can buy your first house there is free money in Federal tax credits and some states even have more money.

If you are in for the long haul you can make some great investments right now.