Why Housing prices may not go down as much as you would expect (something called real and nominal prices).

We are in mid stream of the bursting of the US Housing bubble and some regions of the US are getting hit hard while others are faring OK.  Well, if you’re not in the overbuilt areas such as Florida and Las Vegas or the ultra Bubble areas such as those in California, prices have gone down but not dramatically.  In these more stable areas, prices may not drop as low as previously thought.  The reason behind this entails the consideration of real and nominal price activity.  Real estate is said to grow some three to four percent in nominal terms every year…that is price increases including inflation.  The Housing sector has been stagnant to downward moving since mid 2006, and that’s almost two years.  What that means by prices not moving up at all for two years is that in real terms (adjusting for inflation) that they actually dropped almost 8%.  Add the actual approximate 10% drop in prices for houses since that time and you have an 18% overall drop.  So by 2009, if housing prices continue to remain weak, that would signify an over 20% drop from the highs reached during 2006.  So will prices go down…very likely but if you incorporate time and inflation, the decline may be muted.

What the Fed appears to be doing is buying time to help stabilize the real estate market.  By cutting rates so dramatically and promoting a solid pace of inflation, housing prices may not go down as aggressively.