How far have housing prices fallen? The answer depends on who you ask.

The most popular national answer (but by far the least accurate) is provided by the National Association of Realtors (NAR). Their data shows that prices are down 13% from their peak in April 2007. But NAR relies on the median price, a phantom figure representing abstract property which does not actually exist and does not reflect the price mix of homes.  The median price is a fabrication, the creation of an exceedingly misleading mathematical abstraction.

The Federal Reserve uses national numbers taken from the Office of Federal Housing Enterprise Oversight (OFHEO). These numbers show that prices nationally have only fallen 3% from their peak. The OFHEO only includes mortgages insured by Fannie Mae and Freddie Mac, which excludes any data on subprime or jumbo loans. Therefore, OFHEO understandably understates the rise and fall of housing prices, as the prices of those loans inflated the highest during the bubble, especially in California.

The S&P/Case-Schiller national index (a better price indicator which includes all types of homes, but misses some rural areas) shows a 10% drop from the housing price peak of the fourth quarter of 2007. An index of ten major U.S. cities shows a drop of nearly 16% by February 2009.

And how much have housing prices risen? Projecting this becomes even more convoluted.

Another misleading measure from NAR indicates that payments on a house with a 30-year mortgage and a 20% downpayment took up 18.5% of the median family’s income as of February, a drop of 26% from the 2007 peak. On top of the misleading alchemy of using not one but two median figures, credit standards have tightened like a vice, neutering any definitive insight these numbers could ever provide.

One predictor involves trendsetting based on real estate related futures contracts associated with the Case-Shiller ten city index. While investors predict another 20% price drop, this may be an overstatement as the futures market is a microcosm of the larger, and more complex real estate market, including income properties.

Another indicator for predicting how much further housing will drop is the gap between supply and demand. Currently, the national homeowner-vacancy rate is at a high of nearly 3% (which translates to a glut of over one million to be sold nationally), compared to the average number of homes to be sold between 1985 and 2005. This gap will continue to widen by the beginning of 2010 when foreclosures will once again begin to pour into the market.

Goldman Sachs, using a model that connects housing prices with disposable income and long-term interest rates, expects the national average of housing prices to drop 11-13% before housing price correction is complete. But their model suggests that six states, including California, may see a continued drop of 25% or more.

One of the strongest predictors of future housing prices is a ratio calculated by comparing the price of a house and the value of future ownership (as rental income or as money saved by the homeowner not paying rent, called implicit rent). The national ratio stayed somewhere between 5% and 5.5% from 1960 to 1995, when it then plummeted to 3.5% at the height of the boom in 2006. Prices need to fall by another 10-15% between now and mid 2011 in order to return to the historic ratio, suggesting the housing bust is only halfway through.

first tuesday take: As we have always said, the median price is an abstraction totally disassociated with the actual real estate market. It is a popular figure for CAR and NAR to retch into the laps of brokers and their sales agents, only to leave a stain of misinformation, which agents have to deal with when discussing a listing price with an owner.

A combination of the S&P/Case-Schiller and the price/future value of future ownership ratio provides the clarity needed to see the cold hard truth: we are in the eye of the housing bust storm. It may appear calm with Multiple List Service (MLS) dry of Real Estate Owned (REO) properties and housing prices inching up, but as these numbers show, we are still in for the second half (some time beginning in 2010).

It is the present and recent past acquisitions by speculators and investors hoping to turn a quick buck on a resale who will get burned for failing to listen to solid economic forecasting.

[For more reading on housing prices and the first tuesday take on median pricing, see:

Re: “Map of Misery: America May Well Be Only Halfway Through the House-Price Bust,” from The Economist