Are home prices cheap right now? Or falling more?

There’s no question that home prices are now well within the range suggested by historical trends. One could argue that they are even cheap at this point.

But are they cheap enough?

By a couple of key measures, it’s obvious that the vast majority of the correction in home prices is behind us.

Check out Calculated Risk’s Real House Prices and Price-to-Rent fall to late ’90s Levels, on which you can find the graphs below.

First, home prices adjusted for inflation:

Depending on how one interprets the historical trends, one could say we’re still a little high — or one could say that home prices today are just where we would have expected them to be without the bubble. We could even make a case that they’re too low.

And a different scale for home prices, comparing the prices to effective rents (addressing the whole rent vs. buy question):

The Case-Shiller national index — the yellow line above — clearly suggests that home prices are actually a little low compared to the historical relationship with prevailing rents.

But do those two data points suggest that home prices have bottomed?

Or will we still be burdened for a while with declining home prices because of distressed properties and inventory still too high by historical standards?

If the excess supply swamps these other fundamental considerations, then we’ll see home prices decline for a while yet, but probably not significantly. The continued decline in home prices in today’s Case-Shiller data for December suggests that high inventory will outweigh the other fundamentals.