Housing prices have risen sharply during the past few months. While every market has its own dynamics, recent national trends are more indicative of the magnitude of past declines than a warning sign of overheated markets. But a return to double-digit appreciation rates is worthy of a closer look.

Some differentiation in data is important. The most frequently cited price measures are the monthly Standard and Poor’s Case-Shiller and Federal Housing Finance Agency (FHFA) indexes. Both are repeat sales indexes, which means they measure the selling price of the same house across time to isolate pure price change from changes because a different group of homes is sold. Even comparing the same-house sold in two periods is not a perfect control, but it does address the problem when comparing a shift in the type of homes sold, as most current sales price measures do.

Comparing Local and National Prices As an example, new-home prices have shown 13 percent or more year-over-year increases for the past nine months. However, the Census Bureau’s new-home constant quality price index, an attempt to control for size and amenity changes, is up only half that much. New-home sizes have increased since early 2010, so comparing inventory sold prices can distort the true picture.

The repeat sales indexes showed dramatic declines that began in 2006. Even with recent consistent double-digit annual increases in the 10-city and 20-city monthly and national quarterly indexes, the Case-Shiller indexes are at the levels last seen in fall 2008, and remain more than 25 percent below their peaks.

Similarly, the FHFA national index is at the same level it was in early 2009 and remains 12 percent below its peak. Home prices now stand at the same level they would be if they had increased consistently 1 percent to 1.5 percent a year during the past 10 years.

Even the erratic national picture pales when compared with local markets that rose 30 percent to 40 percent per year. One way to compare relative prices across markets is by comparing the house price-to-income ratio. In the 1980s and ’90s, U.S. buyers bought homes that were 3.2 times their annual income. That ratio climbed to 4.7 in 2005 before recently falling back to 3.2. At the peak, this measure was 150 percent above historic levels. A comparison among historic levels, the peak, and current ratio provides one view of whether house prices are abnormal relative to local incomes.

The poster children for most extreme price changes—where the ratio was 200 percent above normal—are Florida, Nevada, California, and Arizona. At the other end of the spectrum, the ratios rose less than 10 percent above historic levels in industrial and farm states such as Indiana, Ohio, and Kansas. Most states and local markets are back to their historic ratio of house prices to income. A few overcorrected such as Georgia, Michigan, and Nevada, but no state is more than 20 percent away from its historic level.

Buyers Return to the Market The five-year below trend home buying market is finally reviving. Home buyers are coming back because of low mortgage rates and affordable house prices. The sudden influx of buyers along with investors taking advantage of below-cost production prices has generated renewed interest and fed the cycle.

But the pent-up demand and investor interest will wane as prices increase. The Case-Shiller index also publishes indexes for one-third segments of 16 metropolitan areas. Each local market is divided into thirds according to local prices and changes compared. In most metro areas, the lowest third is increasing at two to three times the rate of the upper third.

Builders competing at lower price points should be seeing escalations while price competition at the upper price points has not been as frantic. Prices will continue to rise, but at more sustainable 5 percent to 6 percent annual rates.