Home Price Vs Inflation

In the third quarter of 2006, we compared median home prices against the Consumer Price Index, going back to 1963, and found that the two series were tightly correlated. In fact, their correlation was 0.98 – a relationship that’s unusually high in the financial world. We’re not suggesting that housing and inflation go up one-for-one. Actually, because of the leverage provided by mortgages, housing advances nearly twice as fast as inflation overall.



Based upon their cozy relationship over the previous 40 years, we determined that median home prices overall got as high as 15 percent overvalued in 2006, owing largely to a price surge that began at the end of 2001. Since peaking in July of that year, median home values have retreated more than 10 percent. Over the same period, the Consumer Price Index, as we have witnessed this morning, has advanced 4.7 percent.



Rerunning our analysis through January suggests that our nation’s median home price is merely 3 percent overvalued, suggesting that most of the froth has subsided. Before we declare the end of the housing bubble, we do need to address the oversupply of residential real estate and tighter lending standards. Despite those challenges, the fact that we’re moving back toward equilibrium is a huge positive.