Various charts show home prices are now back to levels last seen in September-October 2002. I posted such a chart constructed from the LPS Home Price Index (HPI) in LPS Home Price Index Shows U.S. Home Prices Accelerated Decline.
Real vs. Nominal Prices
Nominal prices are arguably not the best way of looking at things. I asked Doug Short at Advisor Perspectives if he would chart "Real" home prices. His answer was "In a heartbeat, if I can get the data".
"Real" in this case means "Inflation Adjusted" price, nominal simply means the "Current Price".
After receiving an Excel spreadsheet of the HPI data from LPI, I passed the spreadsheet on to Doug Short. I suspect he did not know what he was getting into, because once I supplied the data, I started asking for all kinds of charts.
I asked Doug for help for the simple reason his charts and the charts by Calculated Risk are in a class of their own. Advisor Perspectives frequently uses my articles so I went that route.
Note that "Inflation Adjusted" itself can mean many things, and indeed this post will take a look at "Real" home prices from several angles.
HPI Nominal Price, PCE Adjusted, and CPI Adjusted
click on any chart for sharper image
The two most common ways to adjust for price inflation are the CPI (consumer price index) and the PCE (personal consumption expenditures index). We use the CPI in the rest of the charts below because individual components' percentage weights are readily available.HPI Comparison
- Nominal prices have fallen to a level first surpassed in August 2002
- PCE adjusted prices have fallen to a level first surpassed in March 1999
- CPI adjusted prices have fallen to a level first surpassed in March 1998
That sounds pretty dramatic and it is. However, I propose the bubble is bigger and the crash worse than using the CPI deflator straight up.CPI Flaws
One of the biggest flaws in the CPI is its measure of home prices. The CPI does not track hope prices per se, rather the BLS uses a concept called "Owners' Equivalent Rent
" (OER) as a pro