Are house prices back to normal?

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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.