California and Nevada home prices are on track to return to normal levels by September 2008. While Florida made a good showing– lopping 5% off average home prices in 3 months– prices there are not likely to reach sanity until Christmas. These states, along with Massachusetts (expected to have relative bargains by July) are poised to lead the nation’s recovery by quickly returning to fair market prices and business as usual.

On the other hand, it would appear that large economies such as New York are slow to take the hint. At the current rate of price declines, NY will not reach historic parity until spring of 2011. This slow, painful decline is likely to criple the regional real estate market in areas that surround the Big Apple.

Market corrections tend to fall on momentum below the long term price trends. Like all averages, there must needs be some data points on each side of the line. Looking at the long-term inflation-adjusted trends, falling housing markets tend to overcorrect by about 15-20% before returning to an upward price trend. In the case of California and Nevada, they are on course for a full recovery to market resilience by June 2009. By that time prices will have fallen a jaw-dropping 40% in real-dollar terms.

Keeping always a careful eye on Michigan– a state that has been badly affected by the current downturn– home prices there continue a moderate decline. Fortunately, the data suggests a brilliant ray of hope for the state. After having reached an all-time low in their inflation-adjusted home price trend index, there is tremendous upside potential in this Great Lakes state. With an abundance of talented workers, Michigan is ripe to rekindle a manufacturing boom in the U.S., led by businesses that find ways to profit by reeling in off-shore production.

Stay tuned: Since my last post, the OFHEO has begun to release some stats on a monthly basis. I plan to analyze and post interesting tidbits from those data releases. In any event, be sure to return on August 26th 2008 to see the cliffhanger animation of the 2008 Q2 home price data.

Data comes from today’s OFHEO data release. Methods are the same as my original home price heatmap. The dataset spreadsheet for this release is made available here.

BTW, colors on the map have the following meaning: red indicates that homes are selling above the historical price trend and blue indicates that sale prices are below long-term trend for municipalities in that state based on same-home sales data from 1975 through March 2008.