Tuesday , 25 June 2024

Price:Rent Ratio Suggests House Prices Have Further to Fall

The rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much housing prices will ultimately adjust. [Let’s take a look at some differing points of view in that regard.] Words: 497

So says Dave Altig, senior vice president and research director at The Federal Reserve Bank of Atlanta (http://macroblog.typepad.com)  in an article* which Lorimer Wilson, editor of www.munKNEE.com,  has further edited ([  ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Altig goes on to say:

New York Times chart that suggests there will be a significant adjustment going forward:

[Personally, I maintain that] the better way to think about the “right” home price is to focus on price-rent ratios, because rents reflect the fundamental flow of implicit or explicit income generated by a housing asset… A simple back-of-the envelope calculation for this ratio—essentially comparing the path of the S&P/Case-Shiller composite price index for 20 metropolitan regions to the time path of the rent of primary residences in the consumer price index—tells a somewhat different story than the New York Times chart:

According to this calculation, current prices have nearly returned to levels relative to rents that prevailed in the decade prior to the housing boom that began in the late 1990s.

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Of course, the price-rent ratio is not the most sophisticated of calculations…David Leonhardt shows the results from other such calculations  [in a recent article** in the New York Times]  that suggest prices relative to rents are still elevated, at least relative to the average that prevailed in the 1990s but the adjustment that would be required to bring current levels back into line with the pre-crisis average is still much lower than suggested by the New York Times graph.


How much farther prices fall is, I think, critical in the determination of how the economy will fare in the immediate future… The direction of home prices is important for the economy because changes in home prices affect the health of both household and bank balance sheets. … -and] the indirect influence of the housing sector on consumer activity and bank lending would almost certainly aggravate housing’s impact on growth.

Here’s hoping my chart is more predictive of housing prices than the alternative.


** http://www.nytimes.com/2011/05/11/business/economy/11leonhardt.html?_r=3&ref=business

Editor’s Note:

  • The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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One comment

  1. What is referred to as the price:rent ratio, is the gross rent multiplier technique. While overall metro changes can show a declining or rising market, the essence of the GRM technique allows neighborhood identification and corresponding valuation of a property within the neighborhood.