Right on track, adjusted same home sale prices are settling down. I expect a good deal more white and light blue in the final frame come the Q3 2008 data set that will be released by the Office of Federal Housing Enterprise Oversight on November 25th.

Beyond 2008, the map will swell with a sea of blue ink. Long term averages require a balance between years of red and years of blue. Because the sharp upward shock in real estate prices was not an isolated regional event, I would expect the transient spike to rapidly dampen itself in a similarly synchronized fashion.

It is an open question whether regions that soared 40% above trend will merely drop to values 15% to 20% below trend as they have done in past corrections, or whether they will suffer an equal and opposite geometric penalty and sell for 28% below their expected long-term value. (In this context, expected long-term value takes into account both inflation and regional growth trends.) The outcome largely depends on how public policy will impact employment and the mortgage credit market over the course of the next six months.

The pretty animation above is compiled from data released today by the OFHEO. Methodology is the same as my original home price heatmap. For the data nerds out there, you can download the compiled numerical results.

Colors on the above map are keyed as follows: red is for homes that are selling above their historical price trend and blue highlights states where sale prices are below their long-term inflation adjusted trend based on same-home sales data that spans over 30 years, from 1975 through June 2008.