Today the Case-Shiller October numbers were released. It takes a couple months to process the data for these indices, hence the December release of October data. Importantly, the measure is confirming what we have felt at the ground level with many homes receiving multiple offers and inventory levels falling to less than four months. We have seen median prices bouncing between positive and negative month-to-month changes for several months. Now one of the most watched repeat sale measures is also demonstrating flattening.

How organic is this price leveling? Some measures we employ attempt to gauge where prices are relative to fundamental values. This includes, price/rent ratios, price/income and the amount of homes present in the Valley relative to the employed population. Employment is a wildcard, although we believe a lot of this is already baked into current prices. So should many of the vacant homes on the market and the amount of homes in default, although significant guesswork is involved. By these measures, home prices have returned to fundamental values (locally, though nationally it looks like some more room for decline). When prices are at levels that make sense, it makes it difficult to forecast. Last year, we had good predictability in house price declines. Currently thats hard to say.

The other primary ingredient in recent months has been the tax credit. This probably has served to hold up prices. Thats not a very organic component. What we need long-term is greater household formation.

Nevertheless, we see that based against the long-run, pre-bubble trend, prices are deeply, deeply below trend, embodying a serious correction and probable over-correction. There still is a potential for further house declines as information often arrives randomly and can quickly alter behavior. But many believe we will have higher interest rates staring us in the face in 2010. That implies that there is a pretty good chance that this is one of the best opportunities to seek out residential real estate, even though there are some artificial ingredients in the recipe for housing prices. The key is to buy smart and if possible below where you think the market is. Then you have a built in buffer on a downward slide or built in equity if prices flatten or bounce up.

 Source: Standard & Poors.