U.S. home prices not so overvalued anymore?

I've created a new graph, which compares national home prices to national owner-equivalent rents. These are not dollar values, but index values with Q1 1997 equal to 100.

Click on the graph to see a full-sized version:


According to this graph, the national price/rent ratio is 10.7% higher than in Q1 2007. I haven't built a graph for the D.C. area yet, but running the numbers shows that the D.C. area price/rent ratio is 21.6% higher than in January 1998. (D.C. area rental data only goes back to December 1997.) Even worse, New York City area price/rent ratios are 38.2% higher than during January 1997. Of the twenty metro areas that the S&P/Case-Shiller Home Price Index tracks, New York and Washington are the slowest decliners. This is why I believe New York and Washington will bottom later than the country as a whole.

In the past I have argued that home prices don't overshoot, but the trajectory of the graph above suggests that in time I may be proved wrong. The current trajectory seems to suggest we are in for massive overshooting. You have to buy foreclosed homes or short sales to get the bargains, though.