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Will House Prices Drop Further?

The decline in housing prices seems never ending.  Prices have dropped for over 5 years and some still expect the bottom to fall out from here.  One simple way to approach housing prices is to compare them against inflation.  In this example, we will look at the Case-Shiller Composite-10 Home Price Index and the CPI Urban Consumers Index Seasonally Adjusted Less Food and Energy.  The home price index includes the metropolitan areas of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC.  With this data, we can go back to Jan 1, 1987:

From this simple metric measured during this specific time period, we might conclude that housing prices need to drop another 15% to hit the inflation trend.  Unfortunately, nothing is ever that simple.  Each metro area is vastly different with prices in Las Vegas down a devastating 60%+ while prices in New York are down about 25% from the peak.  It is also very important to note that 30 year mortgage rates were well north  of 8% in the late ’80’s while the current rate is hovering below 4%.  On the flip side, bubbles usually correct further than “fair value”.  One easy conclusion: the bottom is a lot closer today than it was 5 years ago…

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