Home Price Hysteria: Triple Dip Drama A Delusion

Headlines today are warning of another forthcoming dip in home prices as a financial analysis firm declares that home prices are headed down again.  How far down?  Here an except:

The besieged housing market has even further to fall before home prices really hit rock bottom.

According to Fiserv, a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.

So home prices could possibly decline 3.6% between now and June?  Pardon me folks if I am simply unimpressed by the alarms being sounded.  It is not that I don't believe what they are saying. Rather, I believe that this is a contrived headline and these numbers are inconsequential to us based on the big picture.

The truth of the matter is that house prices have bottomed, bottomed again a few months ago, and will likely bump a bottom again "by next June."  To see why this is a non news event, lets take a look at the house price index charts from CalculatedRisk:

As you can see the double dip was really us bouncing along the bottom of house prices.  A triple dip will be an even less newsworthy event.  House prices have blown off all their excesses and now are operating in the historical price range ratios that are more closely tied to household income instead of household income leveraged to the Nth degree through interest-only and option-arm loans.

This correction in house prices and their return to equilibrium prices becomes even more apparent when you look at prices adjusted for inflation:

Due to Uncle Sam's incessant printing of money, house prices have never really stopped dropping in real terms.  Which means that today's house prices are right about in the sweet spot of equilibrium.  Even if home prices didn't drop a dime in the next year, the printing presses are still running which means that each year the homes become a better and better value at current sticker price. 

Meanwhile, price-to-rent ratios are also showing we are very near to equilibrium:

So, the next time you hear headlines telling you that the sky is falling, be sure to look up.  You will likely live to tell the story the next morning...if it's a story even worth repeating.