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: