The recovery in U.S. house prices has been a major contributor to the more optimistic mood on the economy. The rebound, as shown in Chart 1, has helped balance sheets of banks and households and boosted consumer confidence. However, when we dig beneath the headlines, the housing market still looks quite frail.
The steep drop in house prices post-2006 stopped around 2009 but further erosion continued until 2011. Since then, prices are up about 10% nationwide, more sharply in areas such as Phoenix, Las Vegas and
Detroit where the price collapse was the largest. Nationwide, prices are still about 20% below their peak in 2006, a level which was about triple that of the level prevailing in the mid-1990s.
The story of how this happened has been well and often told, as well as the bursting of the speculative bubble, which was arguably the biggest and longest lasting (1995 to 2006) in U.S. history on a nationwide basis (Chart 2).