Another -15% housing prediction
Looking for more evidence that housing prices have a long way to come down?
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
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.
This is the second day in a row that 15% number has shown up in an establishment media story about housing. But as we noted here yesterday, a more likely and realistic figure is 30%… or even 43% .