House prices: Is the Fed making the same mistake again?

House price data indicate that the painful readjustment process is complete. It is time for the Fed to stop manipulating prices.

More than seven years after the bubble peak in U.S. house prices, and four years after suffering the 2007-09 price collapse, American house prices are now recovering and indeed rising rapidly. The average house price went up over 12 percent from July 2012 to July 2013, according to the S&P/Case-Shiller house price index. There has even been talk of new house price bubbles. But where are current prices when put in historical context and what does this mean for future Fed actions?

First, let us measure average U.S. house prices in inflation-adjusted (real) terms so we are not fooled by the constant depreciation of the dollar. Figure 1 shows house price history since the mid-1990s in inflation-adjusted terms, displaying the Case-Shiller index in constant 1996 dollars.

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