After adjusting for inflation, however, housing prices have fallen about 5% in the past two years. Real home prices are now about 39% below their 2006 peak. That's a significant price adjustment.
We can look at prices over a longer period thanks to the Case Shiller data which covers 10 major metropolitan areas (the top chart covers 20). This third chart is also adjusted for inflation.
Those looking for further significant declines in housing prices might like this chart, since it suggests that prices could fall back to their 1997 lows, which would imply a 32% decline from today's levels. That would be painful indeed.
On the other hand, this chart of real median existing home prices shows that prices today are about the same as they were in the late 1970s, and that prices haven't even increased in real terms by 1% a year over the past 40 years. (It seems reasonable that real home prices should tend to increase by at least some small amount over time, to reflect rising real incomes and a rising standard of living).
In my opinion, what all these charts show is that there is good reason to think that the "bubble" in housing prices that formed in the mid-2000s has disappeared, and that prices today are reasonable, give or take a little, compared to long-term historical trends. There is no compelling historical reason, in other words, to think that prices need to drop significantly from current levels. Moreover, new home construction has been far below the rate of new housing formations for several years now, so we know that the excess inventory of homes has declined significantly. Whatever slack is left in the housing market could quickly become used up by a combination of 1) moderate economic growth, 2) rising incomes, 3) rising inflation, and 4) new household formations. And of course with mortgage rates near record lows, the effective cost of a home today is quite low by historical standards, perhaps as low as it's ever been.
I continue to believe that we've seen the worst of the housing market, and that the next shoe to drop will be the surprising news that prices are starting to rise and residential construction is starting to improve.