U.S. Housing Prices: Are They Headed Up, Down, or Sideways?


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Housing prices showed steady, modest increases until the post-2000 bubble. Credit: Housingbubble.jparsons.net (public domain).

Housing prices showed steady, modest increases until the post-2000 bubble. Image by JP

The collapse of the U.S. housing market was long, slow and excruciatingly painful, wiping out millions of homeowners and trillions of dollars of equity in the process. Where’s the market headed now?

The U. S. Housing Bubble

Real estate prices experienced an incredible run-up nationally from 2000 until 2006, increasing by about 67% on an inflation-adjusted basis over that time span. Wall Street demand for mortgage-backed securities, political exhortations, rampant speculation, permissive lending and lax regulatory oversight led directly to historic, yet unsustainable increases as demand swept over supply.

However, economics has an axiom that will eventually prevail: supply and demand must ultimately reach equilibrium. If out of balance, market forces eventually take hold to bring them back in line. Such was the case after the extraordinary increases of the early-to-mid 2000’s, as demand suddenly fell, taking prices along with it. The oft-cited housing bubble deflated, wreaking havoc and economic destruction throughout the economy. Prices trended downward relatively slowly at first, then plummeted as the financial crisis struck the United States in late 2008, triggered by the collapse of Lehman Brothers.

For the next three years, home prices continued their inexorable declines, finally bottoming out nationally around the end of 2011/early 2012. Or did they?

U. S. Housing Market: Prevailing Viewpoints

The most common outlook by pundits and analysts is that the U.S. housing market has begun to recover, and that the recovery is rooted in solid fundamentals. Web-based real estate tracking pioneer Zillow pointed out that November, 2012 represented the 13th straight month of national housing appreciation, with values up better than 5% year over year — a pace not seen since just before the bubble burst. With rents increasing (a driver for further growth), Zillow estimated that prices will increase nationally by 2.5% in 2013.

Others share similar views. The National Association of Realtors announced that the rate of increase was accelerating as 2012 came to a close, portending further improvement over the coming year. Bloomberg reported that 19 out of 20 cities surveyed in the S&P/Case-Schiller index of property values rose in 2012, headlined by a 22.8% increase in the Phoenix, Arizona metropolitan area. San Francisco improved by 12.7%. Home sales were up 12.8% in December, 2012 as compared to the one year earlier.

Chairman David Blitzer of the S&P index committee summed it up. “Housing is clearly recovering,” he declared. “These figures confirm that housing is contributing to economic growth.” Economist Karl Case agreed. “There are a lot of good signs,” he said, but conceded that there is still “a long way to go.”

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