Saturday, June 21, 2008

Are Home Prices Still Too High?

We discussed here that under normal financial/housing conditions, existing home sales would probably be around 5.8 million per year, compared to the 4.9 million pace we're on right now. What about home prices? We know they rose to extreme levels for most of this decade, but we also know they've come down from those levels. We might get a clue as to what home prices will be once things stabilize if we knew, based on income and demographics, what would home prices be right now if we hadn't gone through this bubble?

Here's a look at the S&P/Case-Shiller US National Home Price Index since 1987:
The way Case-Shiller determines the index is quite interesting. The index considers individual homes that have been sold twice, and considers the price appreciation between those sales.

Based on the exponential trend line added below, we see that home prices may be close to normal levels. That doesn't mean they don't have further to fall, however. As long as confidence is low, and the economy is bad, home prices my continue to fall. But for those who have the ability to wait the housing market out until things stabilize, they should be able to realize prices slightly higher than what they are now, presuming the demographic factors that fuelled this trend line continue into the future.

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