As explained in our earlier papers, home prices have typically risen at approximately the rate of overall inflation over the course of the last century. Keeping with economic theory, which contends that a home’s sale price is derived from the rents it can generate, home prices in the United States have also moved in line with rental prices. Beginning in 1995, however, this seemingly stable relationship between home prices, rents, and inflation radically diverged from the historical trend. Home prices shot up while rents continued to move in line with inflation. Where the ratio of median sales price to median annual rent had hovered close to 15 to 1 in recent decades (i.e. it took $150,000 to buy a house that would rent for roughly $10,000 per year) at the peak of the bubble in 2007, it went above 25 to 1 in many inflated markets.Short answer: It depends on where you live. Full answer: Read the paper here.
For purposes of analysis, this paper treats a home price that is 15 times the annual rent of a comparable home for rent as being at an equilibrium sale price, and defines a bubble market as one in which the ratio of price to annual rent exceeds 18 to 1. The paper also compares the current monthly costs of owning and renting.
Based on this measure as well as fairly conservative mortgage underwriting and rental market assumptions, this paper seeks to provide insight into two important questions:
- After two years of decline in real estate markets, has the monthly cost of a modest home purchased today reached a level that is comparable to the historical cost of renting? and
- Can a household that buys a moderately-priced home today expect to gain equity within five years?
Tuesday, August 11, 2009
Have home prices hit bottom?
The Center for Economic and Policy Research (CEPR), one of the first organizations to spot the housing bubble, has a new paper out analyzing home prices in different markets throughout the U.S.A. Here's the introduction:
Subscribe to:
Post Comments (Atom)
Posts
yeah this is inline with how mortgages in the DC area are about 8-10 times what rent would cost you.
ReplyDelete"Only three of these markets, however, are predicted to have larger losses in equity relative to last year (Providence-New Bedford-Fall River, RI-MA; Washington-Arlington-Alexandria, DC-VA-MD-WV; and Worcester, MA). In the remaining 18 markets, homebuyers this year can expect to see less loss of value than homebuyers last year. Yet, even accounting for the improving equity outlook over the next four years, renting continues to be a more attractive option for homeowners in these markets."
ReplyDeleteWow that's a harsh assessment, they're saying people who bought in the DC area this year will actually be in worse shape equity wise than those who bought last year! It certainly seems financially prudent to rent in this current market if you have the choice.
Wait, are we talking about a Five o’clock shadow or Real Estate? What’s going on? Inventory is inventory regardless of when it is on the market to be sold. Instead of attaching new buzz words that do nothing but add shock value to an otherwise irrelevant report, we should be concerned with the recovery of the market.
ReplyDeleteThese findings were mentioned months ago in this Housing in Crisis report (accuriz.com/RealEstate_Reports.aspx), so where is the news here? We all know that there is an oversupply and it will take time for the units to be absorbed. Is this a ploy to scare the public into believing someone's self-fulfilling prophecy on the housing market? There are inanimate units “lurking in the shadows?” Really?
Why is it such a bad idea to for homeowners to keep their homes off of the market when they can afford to do so? We’re in amidst of one of the worse economic downturns since the Great Depression. It would be insane to “flood the market” with inventory knowing that the supply is much higher than the demand at this time. You lose out on getting top dollar for your home.
The population is swelling in New York City and builders were prepared for it. It’s no surprise that there are empty units and the like. So it makes sense to hold on to selling, rent, and wait for positive signs in the housing market. Recovery is the topic of discussion of the housing market, not fabricated buzz words that sounds like an afterschool show.
"So it makes sense to hold on to selling, rent, and wait for positive signs in the housing market."
ReplyDeleteYeah except a flood of empty rentals, like say the thousands of empty condos in the MD area of DC, causes no rental income either. Rents are dropping in montgomery county for a reason. Everyone wants to hold out for "positive signs"....there just arent any.
I'm quite confused about how it says that both the DC and Baltimore areas are such bad places to buy right now. Using their calculations my husband and I got a great deal on the townhome we just bought in Odenton, MD (granted this is far out there, and is a 20-30 minute drive to both DC and Baltimore, lying about half between those 2 cities.) However, I just looked up what townhomes nearly identical to ours are renting for in our subdivision of Seven Oaks in Odenton and the prices ranged from $1400-$1900 per month. By the article's calculations, the fair 'correct' value of our house would then be what the house can generate in rental income per year times 15. So conservatively, the rental revenue for our home would be $1400 per month*12 months = $16800. Then times 15 gives, $16800*15=$252000 value of our house. (The high end of our house value by the article's calculation would be $1900per month*12*15=$342K) We bought the house for $225000, so I have a hard time seeing how prices can drop that much more.. (Zillow thinks our townhome is worth $295500, which I definitely don't believe.)
ReplyDeleteTo me this just shows that even within a particular market, that each neighborhood is different. We'll have to wait and see what prices do next year though. Hopefully the article's method of calculation of a fair house price is correct, because that tells me I can sleep happy.
Tanja-
ReplyDeleteI have to agree based on our neighboorhood rental rates of 1900-2500+ a month for a row house it would take anywhere from 342000 to 450000 to buy the house we just purchased. We paid significantly less than even the lowest number. I don't think we got the deal of the century but I think it was okay. We are closer to a 12 or 13 to 1.
Also, the rent vs. ownership costs calculations are way off for at least the neighborhood we are purchasing in.
ReplyDeleteWe are right in the middle of the low to middle in ownership costs for DC. However, there is no way in hell you could get rent a 3 bedroom house for $1600. You would be hard pressed to get a 2 bedroom basement apt. (although possible) for $1100.
"However, I just looked up what townhomes nearly identical to ours are renting for in our subdivision of Seven Oaks in Odenton and the prices ranged from $1400-$1900 per month."
ReplyDeleteThats hard to believe as I rent a townhome in Potomac for $1500.
"Thats hard to believe as I rent a townhome in Potomac for $1500."
ReplyDeleteMaybe you got a great deal - I don't know any particulars about the townhome you live in. Just looking through the rental listings for Potomac, it appears the cheapest rental townhomes there are in the neighborhood of $1800/month. I would be careful not to let your landlord know that though... ;-)
I'm apt to believe the numbers I found because I do know first-hand how much it costs to rent out here where I bought - The apartment complex half a mile away rents its 1 bedroom apartments for $1300 a month.
Dear,
ReplyDeleteI want to make 1 guest post in your blog, if you permit me. The post contains 350 words above and totally unique as it is written by my content writers.
Please contact me at ericasmith568(at)gmail.com soon. Moreover, I will place your link in one of my finance sites.
"it appears the cheapest rental townhomes there are in the neighborhood of $1800/month. I would be careful not to let your landlord know that though... ;-)"
ReplyDeleteActually, I barter, as should everyone. I think he wanted $1700 when I first came to look at it, I told him I want it for $1500 and he told me no. I left and came back 2 months later and offered $1500 and he took it.
Im willing to bet, that eventhough ads may show homes in the sticks for $1800, that I could get one at $1100 by simply offering and then coming back later when they realize I was the only guy looking.
tanja said "Using their calculations my husband and I got a great deal on the townhome we just bought in Odenton, MD".
ReplyDeleteTanja, I don't think Odenton is considered part of either of the metro areas. When you're driving 30 minutes to the city thats a suburb/exurb and those are the areas that have drastically dropped in value in the region. Particularly in DC, the city and close in upscale suburbs have held their value remarkably well during the downturn so far. So they still remain a bad deal by the price/rent ratio standard.
Not when they are predicting that housing prices are going to continue to decline until 2011. Maybe homeowners should step up and do something about it and not wait for the government. If you are considering foreclosure maybe try and work something out with your bank. Lower foreclosures in your neighborhood lower short sales.
ReplyDeleteIf you need a place to start go to this site www.getloanmodified.com. It is free to homeowners and provides you with worksheets to help you out.
Let's not confuse "asking price" and the actual price for monthly rent or home purchase. Also, the figures in the report are based on statistics, not anecdotes.
ReplyDeleteI love this news today
ReplyDeletehttp://www.washingtonpost.com/wp-dyn/content/article/2009/08/13/AR2009081301500.html