Here’s an updated version of the chart comparing the Case Shiller to what we would expect the price of a house to be based on historical inflation and mortgage rates. Just to remind you the red is Case Shiller and the blue is the expected price.

I’m guessing that most of you will find that to be a pretty big eye opener, like I did. It shows that things are way more out of balance than I expected. Of course we all know things are out of balance, prices shot up the last two years and now that mortgage rates are rising, this has really opened the gap between where prices are and where they should be based on inflation and mortgage rates.

For those of you who prefer a log scale here’s the same data but with log scale for price:

When viewed with a log scale (which arguably is the correct way to view this data) things look less dramatic, but still a sizeable imbalance.

After looking at this, two questions come to mind for me.
1) What will be the path that brings these two back in balance?
2) How long will that take?

(On a side note, I also wonder if it is reasonable to expect that these two do come back in balance. Most the time I think about this, I come back to thinking they should, but I’m open to anyone who’s got a good argument why this isn’t so.)

Anyway, I’ll post the above now, and potentially later I’ll share some charts about where these graphs go with various assumptions (guesses!) as to where inflation, mortgage rates and prices go. If anyone has a scenario they think is particularly likely feel free to post and if there aren’t too many I’ll try to create the charts that show how that plays out.