USA house prices, ok or not?

I’ve seen the attached graph of the Robert Schiller index of US house prices quoted many times, both in support of a house market recovery, and against, arguing that prices are still high. You could use it either way. It shows that prices are “nearly” back to their long term average.

See this full article athttp://www.huffingtonpost.com/david-paul/those-waiting-for-a-housi_b_875533.html

An extract below:

Last week was but one more setback in hopes for a robust economic recovery. For two years now, economists, pundits and politicians have been looking for evidence that we have put the economic collapse behind us. Yet just last week, the sharp decline in the Case-Shiller Home Price Index and poor jobs report pointed to a stalling in any meaningful economic recovery.

The Case-Shiller index history, shown below, illustrates the extent of the asset bubble in residential real estate that we experienced over the past decade, and how far prices still have to fall to be within historical ranges.

Even with the sharp contraction in prices that we have realized since the unraveling of the mortgage bond market almost three years ago, housing prices remain high by historical standards, and thus it is curious that this week Standard & Poor’s would express puzzlement at the lack of a sustainable recovery. Its report “Global Housing Still Faces a Puzzling Future,” begins: “Since the first-time homebuyer tax credit ended last year, the recovery of the U.S. housing market has been something of a tease.” Unfortunately, that S&P should be puzzled is itself more of a puzzle than the housing market.

In fact, with the expiration of the first-time homebuyer tax credit and looming end to the quantitative easing efforts by the Federal Reserve to hold down long-term interest rates, the housing market is only now being left to face the brunt of post-crisis market forces without those two forms of federal support. As that support falls away, it is hard to be optimistic about the direction of the housing market, and if a rebound in housing is a prerequisite for a sustained economic recovery, we could have a hard road ahead.

In their write-up, S&P projects that when all is said and done, home prices will fall 35% from their pre-crisis peak, meaning that we have another 15% downside to go. Yet by historical standards, this will not produce “cheap” prices as S&P suggests, but rather return prices to within historical norms. But whatever bottom is ultimately reached in housing prices, a resurgent housing market will also require an environment that provides reasonable expectations for asset price stability, if not appreciation. And this appears unlikely to happen any time soon…

But if declining rates were the driver of price appreciation, what does this portend for the housing market if we have reached the floor in long-term interest rates? The factors that could drive interest rates and mortgage carrying costs upward — economic growth, a domestic debt crisis, waning international buyer interest in our securities, sunsetting of QE2 — seem more likely to transpire than those that would push rates lower — reduced U.S. borrowing, depression, deflation, renewed global economic collapse. As such, if a driver of the housing market has been steadily declining long-term interest rates, perhaps it is no longer reasonable to expect the housing market to be a driver of our economy for the simple reason that it is no longer reasonable to expect interest rates to continue to fall.

Standard & Poor’s should not be puzzled. We are on the downside of the bubble now, and that should have a fundamental impact on the prospects for recovery of the housing market. If prices can fall, the psychology of home buying is very different, and for all the reasons that prices rose over the past decades, they could well continue to fall going forward if interest rates trend upward.