Thursday, May 8, 2008

The bottom looks a long way off...

How do we know that the housing market is out of equilibrium?--By comparing it to rental prices. Fed economists predict that housing is going to fall further:
...the rent/price yield in America ranged between 5% and 5.5% from 1960 to 1995, but fell rapidly thereafter to reach a historic low of 3.5% at the height of the boom. Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average. Again, that suggests the national housing bust is only halfway through.

1 comment:

  1. Of course, as people lose their homes and move into rental housing, it's possible that part of the adjustment will come through rents rising more rapidly. Or that the rent-to-home value ratio will resent at a permanently lower level.

    One good thing, I guess, is that we'll see.