A decade’s worth of home equity is gone

Real House Prices and House Price-to-Rent
[Via Calculated Risk]

An update: Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here).

Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels.

Nominal House Prices

Nominal House PricesClick on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2011), and the monthly Case-Shiller Composite 20 SA (through August) and CoreLogic House Price Indexes (through August) in nominal terms (as reported).

In nominal terms, the Case-Shiller National index is back to Q4 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to June 2003 levels, and the CoreLogic index is back to July 2003.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to June 2000.

In real terms, all appreciation in the last decade is gone.

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Essentially all the equity in any house you bought in the last 10 years due to increasing home prices is gone.

In fact, it will not take much of a drop for that number to be 20 years. If you bough a house in 1992, you saw its price double in 20 years. Now it is only worth about 10% more than you paid for it..

At least the price-to-rent ratio – which compares a house price index with a rental index – indicates that prices will not drop too much more. The fundamental ratio should be about 1.

At one point, houses had increased in value over renting so much, that the ratio was over 1.8. Now we are under 1.2.

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