Home values seem to have fallen enough, but do real values that count inflation prove even more dire?

Home values continued their downward slide with Tuesday’s Case-Shiller Home Price Index, the survey of home values by Standard & Poor’s that is considered the definitive voice on home prices. With a monthly decline of 1.3 percent and a yearly fall of 3.7 percent, the index was a reminder of the still-tender nature of home values.

As disarming as those stats are, though, one detail about the Case-Shiller is that it uses nominal prices in its findings, not real prices that reflect the impact of inflation; therefore, with every month, the same question is asked by some analysts and economists – what do prices really look like?

One of those analysts has been Bill McBride of Calculated Risk, and every month, he filters the results of Case-Shiller through his own measurements to find real home values. And every month, his results are not very encouraging.

Real prices differ from nominal prices in that they reflect inflation. So rather than using the current market price, which would be nominal, a real value has been filtered through the Consumer Price Index, the BLS-produced measure of inflation. Because of that, real prices are always lower than nominal and, more times than not, a more accurate portrait of economic conditions.

Such is the case with McBride’s analysis of home values. Though the nominal Case-Shiller, as originally released by Standard & Poor’s, shows that home values have nearly fallen to new post-bubble lows, the real Case-Shiller produced by McBride shows an even more dramatic decline in prices.

“In real terms, the National index is back to Q1 1999 levels (and) the Composite 20 index is back to April 2000,” McBride writes about his graph charting the declines. “In real terms, all appreciation in the ’00s is gone.”

So all of the gains in housing values from not only the last decade, but nearly the entire year before that, have been reversed by the most recent downturn, and they may fall even further.

“In late 2010 I guessed that prices would decline another 5 percent to 10 percent on these national indexes (from October 2010 prices),” McBride writes. “So far prices have fallen another 4 percent to 5 percent on these indexes.”