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Thursday, January 3, 2008

Home Prices Still Way out of Wack

Items of interest:

The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied housing 1960-2007Comment: The 'Rent-to-Home Price Ratio' is out of historical wack. Therefore, house prices need to fall and rents need to rise in order to return to the historical average (5-5 1/2%).

Andreas Lehnert and Robert F. MartinAndreas Lehnert & Robert F. Martin / FED economists /MarginalQ.com:
The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing [pdf, 7 pages] -- We show that the rent-price ratio ranged between 5 and 5-1/2 percent between 1960 and 1995, but rapidly declined after 1995. By year-end 2006, the rent-price ratio reached an historic low of 3-1/2 percent. For the rent-price ratio to return to its historical average over, say, the next five years, house prices likely would have to fall considerably. [...]

If the risk premium to housing and the expected rate of growth of house prices were to return to their historical norms, we can use the rent-price ratio to gauge the size of the potential adjustment to house prices. Assuming nominal rents were to increase by 4 percent per year, about the average since 2001, a decline in nominal house prices of about 3 percent per year would bring the rent-price ratio up to its historical average, 5 percent, by mid-2012. That said, this is more of a back-of-the-envelope calculation than an actual forecast for house prices because we do not have a fully satisfactory model of the rent-price ratio.

discussion:
Greg Ip / The Wall Street Journal:
Home Prices Must Fall Far To Be In Sync With Rents -- U.S. house prices "likely would have to fall considerably" to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade." . . .

Barry Ritholtz / The Big Picture:
How Far Might Housing Prices Fall? -- Our original thesis back in May 2005 was that Home prices could retrace as much as 25%-35% from the peak to re-establish a normalized pricing. Now, a new study shows exactly how and why that might occur: Home Price to Rent Ratio [...]
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Thank you very much.

Diana Olick / Realty Check blog / cnbc:
Home Prices Fall, But Taxes Going Up? Yup! -- Despite the fact the home prices/values are falling pretty much nationwide, your tax assessment may in fact be going up. The Washington Post today reports that property values in Maryland have increased by an average of 33 percent over the past three years.

That's down from the 47 percent average increase three years ago, but given the dip in prices, you’d think assessments wouldn’t be rising even 33 percent. [...]
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Seeking Alpha blog:
Housing Market Tracker - Homebuilder Review -- Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. [...]
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Liz Moyer / Forbes:
Banks' Subprime New Year -- It's a brand new year, but the same mess of troubles for big U.S. banks, as the credit crunch continues to plague lenders.

On the first business day of 2008, Cleveland's National City (NYSE: NCC) slashed its dividend in half, shut down more mortgage operations and said it was going to fire 900 more people, all "to help meet the challenges ahead, and to continue as a strong competitor in the financial services industry," says Chief Executive Peter Raskind.

National City has struggled with rising credit costs and a mortgage business in rapid decline. Like many other banks, both on Wall Street and Main Street, it's been forced to shore up capital eroded by losses. The bank will issue more securities to boost its regulatory capital levels. [...]
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