That’s how long it has been since the average home in the top 20 U.S. cities sold for the price it sells for today. And adjusted for inflation, home prices are substantially cheaper than they were back in May 2004. 

Housing prices peaked in late 2006 and are off roughly 20% since then. The hardest-hit markets since September 2006: Las Vegas, Phoenix, Miami and Tampa, all of which are still more than 35% below their peak. (Denver and Dallas are the only major cities to see prices move higher from that late 2006 national peak.) 

Prices reached a nadir in March 2012 and have risen roughly 20% since then, according to the S&P/Case-Shiller 20-City Composite Home Price Index.

According to Freddie Mac, the average 30-year mortgage currently carries a 4.23% interest rate. That might seem like bad news for anyone that missed out on the chance this past spring to get a 30-year mortgage below 4%. For buyers willing to lock in a 15-year mortgage, then the current 3.31% rate surely appeals.

But any mortgage under 5% is still a great deal, if history is any guide. Mortgages moved below 5% for the first time in decades in October 2009. 

Source: Freddie Mac

The average 30-year mortgage since 1971 has been 8.6%, which means that today’s 30-year mortgage is priced at half the long-term average.

The plunge in home prices a few years ago, coupled with rock-bottom mortgage rates, made homes as affordable as at any time in recent memory. Unfortunately, the recent rebound in home prices, coupled with a modest rise in mortgage rates, has dented that trend.

The National Association of Realtors provides a monthly snapshot, known as the Housing Affordability Index, and this measure recently slumped to a five-year low.
 
The good news: home prices are still more affordable than they were in the prior decade. The bad news: Middle class wages continue to stagnate and probably aren’t keeping up with the rate of home price increases. If home prices continue to rise at a strong pace, many potential homebuyers will simply be priced out of the market.

From 2000 through 2006, there were roughly 1.35 million new households formed each year, according to the Census Bureau. Yet since 2007, that number has remained consistently below 600,000.

That means that over the past five years, a cumulative 3.5 million households that normally would have been formed are still missing. Much of that is reflected in the high number of millennials still living with their parents. 

Demographers assume that this cohort won’t stay at home forever and will eventually create a powerful force for housing demand. But high levels of student debt may compel these younger buyers to opt for smaller, less expensive homes than their parents bought.

According to CoreLogic, there are 1.9 million homes in the nation’s “shadow inventory.” These are homes that are either in delinquency, already in the foreclosure process, or being held by banks and other mortgage servicers. At some point, most of these homes will be released back onto the market. 

That figure is down about 500,000 from the summer of 2012, in part due to the fact that major investment firms have been snapping up many of these properties in short sales. Still, the tidal wave of foreclosures appears to have peaked, with the number of properties going into foreclosure falling by a third from the summer of 2012. 

The recent rebound in home prices is likely to aid the trend, as fewer mortgages are now underwater. Yet a further rise in home process could paradoxically create more headaches for homebuilders, as long-suffering homeowners that were saddled with underwater mortgages now look to put their homes on the market.

We can draw several clear conclusions from these trends. First, many young would-be buyers who have been living with their parents will eventually seek out their own places to live. Renting a home or an apartment is a transitional move toward homeownership.

Second, even though the housing rebound has favored homebuilders that target affluent buyers seeking large homes, future demographic trends imply that future home purchases will be smaller. Builders focused on small, low-priced homes are the best way to play the housing market. 

Third, investors should proceed with caution when picking homebuilder stocks. As I noted earlier this month, analysts still expect the major homebuilders to boost revenue from 15% to 40% in 2014, which increasingly looks like an impossible target. The coming earnings season could lead to a reset for those projections.

Fourth, still-low borrowing costs, coupled with solid rental income, enable many real estate investments to offer solid cash flow returns. That’s why real estate investment trusts (REITs) continue to be one of our favorite asset classes.