The above chart shows the inflation-adjusted Case-Shiller Home Price Index as updated monthly. The right end of the chart shows that in April and May 2009, house prices stopped their rapid descent and moved horizontally. This pause in the fall in house prices was purchased by Washington through giveaways to first time home buyers and by the Federal Reserve through huge long-term loans to Fannie Mae and Freddie Mac.
However, Washington and the Fed were ignoring a huge economics truth, illustrated by the annual Shiller chart. The truth is that, over the long-run, house prices tend to go up at the same rate as other prices (i.e., the rate of inflation).
The Shiller charts show the inflation adjusted prices when the same house is sold and then sold again. The chart below shows that house prices tended to stay constant (after adjustment for inflation) from 1951 to 1997, when President Clinton foolishly triggered the 1998-2006 bubble by changing the excellent roll-over capital gains tax treatment, instituted by President Truman:
Shiller even took his chart back to 1890, finding that house prices were quite stable from 1890 to 1997, except for a temporary dip downward to about 75% of their normal value during the Great Depression.
The victory of Bernanke and Obama over the forces of economic nature in April and May will be as short-lived as a sand castle built on a beach near the water line while the tide is coming in.
Historians will look back at it as an illustration of the fact that you can't fight the forces of economic nature. It will be paired in the economic textbooks with President Nixon's failed attempt to fight inflation through wage and price controls.
Disclosure: No positions.
