TheAffordableMortgageDepression.com employs a tool for analyzing monthly Case-Shiller data in the context of the Housing Bubble.  The following is an explanation of the methodology employed.

Introduction
 
In 1994 the Clinton Administration launched an initiative designated “The National Homeownership Strategy” (“NHS”).  This undertaking was the most comprehensive and transformative housing public policy in U.S. history. 

“The purpose of The National Homeownership Strategy (was) to achieve an all-time high level of homeownership in America within the next 6 years through an unprecedented collaboration of public and private housing industry organizations.” - U.S. Department of Housing and Urban Development, May 1995

The goal was to generate 8 million additional homeowners by year-end 2000 and in doing so increase the rate of homeownership from 63.8% to a record 67.5%.

Implementation

The NHS combined executive, legislative and regulatory mandates and was executed at the national, state and local level.  Many tools were employed in this coordinated effort including:

• The Riegal-Neal Act of 1994 which limited interstate operations of banks not in compliance with the Community Reinvestment Act
• Revisions to the Community Reinvestment Act in 1994 and 1995 which directed lenders to make loans to people who could not otherwise qualify for them based on merit
• The reallocation of Fannie Mae and Freddie Mac resources into subprime mortgages.  This HUD directive established a large and growing source of capital to finance subprime loans and created a lucrative opportunity for the fee-based, mortgage origination industry 
• The use of Government Sponsored Entities (GSEs) and banking regulators to pressure lenders into meeting subprime lending goals 

The National Homeownership Strategy succeeded in realizing record homeownership gains, but in doing so it created The Housing Bubble and a decade long economic distortion. 

The Housing Bubble's Origin

Immediately upon implementation of the NHS, The Homeownership Bubble began.



Increased access to subsidized credit with generous terms caused demand for houses to expand, transaction volumes to rise and inventories of "for sale" properties to tighten.  Mortgage characteristics which properly align the incentives of buyers and act to restrain prices were reduced or eliminated.  These first-generation Affordable Mortgages functionally desensitized buyers to price.  As a result, home values began to rise nationally at an unsustainable pace in 1997; two years after homeownership rates started their precipitous climb.







Framework for Analyzing Monthly Case-Shiller Data
 
Since housing prices began to decouple from the fundamentals of value in 1997, it makes sense to analyze current prices relative to the sustainable valuations which existed before the distortion.  Calculating what 1997 home values would be today, adjusted only for inflation, provides an interesting perspective on how much farther prices might be expected to fall. 

Pre-bubble housing valuations are adjusted for inflation in an attempt to estimate an undistorted, fair value.  It is logical to expect that home prices appreciate in kind with inflation as the cost of housing inputs, including materials, labor and land, fluctuate with consumer price changes.  Excess housing appreciation inevitably leads profit-seeking builders to increase supply (as we experienced during The Bubble), regulating prices at roughly the rate of inflation.  In fact, several hundred years of housing data clearly establishes this relationship between home values and the rate of consumer price changes.

Qualifying Inflation-Adjusted "Fair Value"

Most of the factors which determine housing market prices are far less favorable today than they were in 1997.  The supply of homes is larger on a per capita basis, inventories of "for sale" properties are higher, credit availability is restrained, perceived risk is increased, expectations for future price performance are more subdued, private sector subprime loans are largely extinct, effective mortgage rates are higher (relative to adjustable rate loans) and the primary mechanism which supported unsustainable valuations, Affordable Mortgage characteristics, are no longer available.  As such, a reasonable person might argue that the fair value of housing on an inflation-adjusted basis is less than it was in 1997.
 

Link to Case-Shiller Analyses