by Calculated Risk on 5/02/2010 06:00:00 PM

Last night I posted some excerpts from the just released 2004 FOMC transcripts showing there was some concern about a housing bubble in June 2004. A key graph, presented by Fed associate research director Stephen Oliner, showed the rent-to-price ratio through Q1 2004. Oliner used the OFHEO (now FHFA) house price index. Usually the invert is presented (price-to-rent).

Here is an update to that graph through Q4 2009.

Click on graph for larger image in new window.

The arrow shows the rent-to-price ratio when Oliner warned that "even after you account for the fundamentals, there’s a part of the increase [in house prices] that is hard to explain".

Clearly the ratio was even more out of line with fundamentals in 2005.

But the OFHEO (now FHFA) price index is GSE mortgages only, and by far the worst loans were part of the Wall Street originate-to-distribute machine. Using the OFHEO house prices missed the worst loans. However the Case-Shiller index included these non-GSE transactions, so I added the blue line showing the rent-to-price ratio using the quarterly Case-Shiller National House Price index.

If the Fed had been paying attention to all house prices, the graph presented at the 2004 meeting would have been even more alarming. It was scary enough ...