When the housing bubble popped, inflated home values created by government intervention in lending markets began to decline.  Gloom-and-doom forecasts predicted a complete crash in values and homeowners losing their central investment.  However, as most of us predicted, sales rebounded when housing found more realistic pricing:

Sales of previously owned homes in the U.S. unexpectedly rose from a record low, propelled by the biggest slump in prices since the Great Depression as foreclosures surged.

Purchases rose 6.5 percent to an annual rate of 4.74 million from 4.45 million in November that was less than previously estimated, the National Association of Realtors said today in Washington. The median price dropped 15 percent from a year ago, the biggest decline since records began in 1968 and probably the biggest in seven decades, according to the group.

“You have to put it in the context of an even steeper decline for the previous month,” said David Sloan, a senior economist at 4Cast Inc. in New York, who had the highest projection in the Bloomberg News survey. “The net trend is still negative. It does seem that some cheap prices are attracting buyers. I don’t think it’s a clear sign of a revival in the housing market. The housing market is very weak.”

I’m not sure why the previous month would be all that relevant.  No one is arguing that the housing market is strong, especially not in new construction.  However, the prices fell from what was a noncompetitive level from the previous month to a more competitive price in December, just three months after the bubble popped.  That indicates that the market may have discovered its pricing equilibrium within a short period of time, and a harbinger that at least the resale market has stabilized.

In his book Irrational Exuberance, Robert Schiller looks at the historical trends of housing prices as compared to population, T-bond yields, and building costs.  Bear in mind that this chart reflects data already adjusted for inflation:

The huge spike corresponds to the government intervention in the lending markets that set off a mortgage spree, which brought large numbers of buyers into a market for which they had not earlier been qualified.  The massive increase in demand drove housing prices far above the rate of inflation, in a cycle that could only be maintained as long as the government pushed more and more buyers with bad and worse qualifications into the market.

Now, if we have reached bottom by only losing 15% of home values on resales, then we have managed to survive rather cheaply.  Bloomberg’s “worst decline since 1968” description misses the point.  The bubble created an enormous and unsupportable increase in values, and the market is returning to a more rational valuation — which is what happens when bubbles pop.  It’s painful, but eventually the market reaches an equilibrium between buyers and sellers.  In fact, that’s what markets do, and why they work.  Government intervention creates the bubbles that eventually go bust by working against the natural equilibrium of markets.