Average U.S. house prices are back over their 2006 bubble top, as measured by the Case-Shiller Home Price Indices. “Home Prices Recover Ground Lost During Bust” read the Wall Street Journal headline.

But these prices are in nominal dollars, not inflation-adjusted dollars. While the Federal Reserve assures us that inflation is “low,” it tirelessly works to depreciate the dollar. Over the decade since the housing bubble peak, aggregate inflation has been 19 percent, so 2016 dollars are worth 84 cents compared to 2006 dollars.

House prices since 1987 in nominal terms look like this:


In inflation-adjusted terms, the chart is different. Average house prices in real terms are indeed very high, but still 16 percent below their bubble top. They have reached the level of March 2004, when the bubble was well advanced into exuberance, but not yet at its maximum. It had made about 54 percent of its 1999-2006 run.

From 1999 to 2004, real house prices increased at an average rate of 7.2 percent per year. In our renewed house price boom from 2012 to now, real prices have increased at 6.6 percent per year—pretty similar.

All this is depicted in Chart 2:


The Federal Reserve had reduced short-term interest rates to very low levels in 2001 to 2004, which fed the bubble. In 2004, it started to raise them. The house price run up since 2012 has also been fed by extremely low interest rates. Now the Fed must raise rates again and is getting ready to do so. Long-term mortgage interest rates have already increased sharply.

Should being back to 2004 in real terms worry us?  Yes.

Image by Cranach

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