After the peak of the housing bubble in 2006, U.S. home prices fell for six years, until 2012. Are these memories getting a little hazy? The Federal Reserve, through forcing years of negative real short-term interest rates, suppressing long-term rates, and financing Fannie Mae and Freddie Mac to the tune of $1.8 trillion on its own vastly expanded balance sheet, set out to make home prices go back up. It succeeded. Indeed, it has overachieved. Average home prices are now significantly higher than they were at the top of the bubble, as shown by the S&P Case-Shiller national home price index.

If you already own a home, the price boom makes you feel richer. But if you are trying to buy, it makes homes less and less affordable. home prices rise not only faster than inflation, but faster than your income. So far, we have spoken of nominal home prices. But since the old 2006 peak, we have had more than a decade of general inflation, as the Fed strives for perpetual depreciation of the dollar’s purchasing power at a rate of 2 percent a year. The aggregate increase of the consumer price index from 2006 to 2017 was about 24 percent. We need to consider home prices on a real, or inflation-adjusted, basis.

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From 1987 to 2000, the average inflation-adjusted annual increase in U.S. home prices was 0.3 percent. This 0.3 percent annual rate is the same as the very long term trend increase in U.S. real home prices, as calculated over the 117 years from 1900 to 2017, by the Credit Suisse

global investment returns yearbook

for 2018.

In other words, in addition to giving you a nice place to live, it appears that over time on average, homes provide a good inflation hedge, plus a little, but not plus very much. After 2000, in real terms the housing bubble expanded and contracted quite symmetrically, bottoming out in 2012 just about on its trend line.

But it did not resume its trend behavior. The Fed was on the case, and up real home prices went rapidly again, rising over 5 percent a year on average from 2012 to 2017. Their current real level is equal to that of mid-2004, when the bubble was already well inflated, and it is far over — 28 percent over — their trend line as extended from 2000.

Nobel Prize winner Robert Shiller’s estimate of U.S. home price increases since 1953, compared to the increase in the consumer price index, shows that the two track very closely for decades. But they swiftly part company as the 2000s housing bubble inflated, get pretty close again by 2012 as home prices corrected, then once more dramatically diverged, and are now far apart.

Looking at the pattern of real home prices, I conclude that because of the Fed, home prices are too high, and real home prices will fall. Of course, this does not mean that nominal prices must fall. They could go basically sideways for some time, while inflation continues year after year, as the Fed plans, and real prices would be falling. The supply of new home construction has been much more constrained than in the last cycle, which is consistent with this scenario.

That would be a “soft landing,” as is always wished for, and might turn out to be consistent with the Fed’s gradualism in undoing its home price inflation program. The Fed is letting its mortgage-backed securities portfolio run off through maturities and prepayments, not selling any of the $1.8 trillion it still owns, and the same for its $2.4 trillion of long-term Treasury debt. It is raising step by step its target short-term interest rates, but they are still very low and negative in real terms. Nominal short rates of 1.5 percent compared to inflation of 2 percent, obviously gives you a negative 0.5 percent real yield. In a “normalized” financial world, the real yield will be positive, not negative.

Falling real home prices might also be composed of part inflation and part declining nominal home prices. That would be consistent with rising nominal and real long-term interest rates. Since 1971, 10-year Treasury note yield has averaged 2.5 percent more than the CPI inflation rate. Interest rates on 30-year mortgages have averaged over these years 1.7 percent more than the 10-year Treasury. If inflation runs at 2 percent, that gives us 2 percent plus 2.5 percent plus 1.7 percent, or in total 6.2 percent, as the normalized mortgage interest rate. That is a lot higher than the current 4.5 percent and would certainly restrain or dampen home prices. The timing, and whether the landing will be soft or not, is just what nobody knows or can know.

What can the Fed do about this? Nearly a decade after the 2008 crisis, it needs to withdraw its radical interest rate and investment interventions. I am certain that the Fed does not want to find out what would happen in the market if it actually put its mortgage-backed securities and long-term Treasuries out for bids from Wall Street. So about all, it can continue with the gradualist program, keep up its rhetoric about how very gradual everything is, and hope home prices have a soft landing. It is said that “hope is not a strategy.” But that’s the best the Fed has at this point. The rest of us should constrain leverage in the housing sector as the fall in real home prices unfolds.

Alex J. Pollock is a distinguished senior fellow at the R Street Institute (@RSI). He was a resident scholar at the American Enterprise Institute from 2004 to 2015, after serving as president and chief executive officer of the Federal Home Loan Bank of Chicago from 1991 to 2004.