How much have U.S. house prices fallen since their peak in mid-2006? It depends on whether you measure them in nominal or inflation-adjusted terms. According to the S&P/Case-Shiller National House Price Index, the fall has been about 34 percent. That’s in nominal terms, and that’s a lot. But since inflation has continued, the fall in real terms is even bigger.

Adjusting for Consumer Price Index inflation, the drop in house prices since the peak has been 41 percent. There’s a number nobody predicted! The fall in nominal versus real terms is shown in Graph 1. Going forward, if nominal house prices go sideways for a while, as many believe, while inflation continues, as it will, real house prices will continue going down.

Graph 2 shows the nominal versus real paths of the house price bubble and bust since 1996. Nominal house prices are back to the level of 2002. But inflation-adjusted house prices have returned all the way to the level of 1999. In other words, after six long years, in real terms the entire bubble has been reversed.

When combined with rising rents and strong housing affordability, this gives us reasonable hope that we are at last approaching the bottom.

There is one key obstacle remaining, however: The government keeps making it riskier and more expensive to be in the mortgage loan business. As one community banker recently said, “It is probably now impossible to make a loan that might not be deemed illegal in one way or another.” If we could stop the government’s bust-prolonging constriction of private mortgage credit, the cyclical recovery could begin sooner rather than later.

Alex J. Pollock is a resident fellow at the American Enterprise Institute.

FURTHER READING: Pollock also writes “Fearful Symmetry: Six Decades of Treasury Yields,” “Waiting for Hamilton: The ‘Imbecility’ of the EU,” “Seven Steps Needed to Improve Housing Finance,” and “Fixing Student Loans: Let’s Give Colleges Some ‘Skin in the Game’.” Peter J. Wallison says “Hey, Barney Frank: The Government Did Cause the Housing Crisis.” Edward J. Pinto contributes “Housing Affordability: U.S. Is the Envy of the Developed World.”

Image by Rob Green / Bergman Group