Home prices and the current crisis

[caulfield]

I thought this was kind of fascinating.

If you look at charts modeled after the Price to Rent ratio, which compares the average price of homes against the average rent in the same area using a given date as a 1:1 ratio, you end up with what many online speculators are calling a good model of our progress in the current economic crisis.
 
This is a chart of the LA housing boom in Los Angeles back in the 80's and the current trend into 2004 (using 1982 as the 1:1).



It took about 6-7 years in L.A. for the ratio to return to comparable levels of 1:1 as of 1982. As you can see, the latest housing bubble has extended far beyond the peak of that boom following Greenspan's response to the Dot-Com when he lowered the rate to 1%. As a note, 6 years of a falling ratio does not equate to 6 years of falling home prices because after prices plateau, rent rises up to make up the slack. The next chart shows a projection into the start of 2009 for the major cities, using instead 1997 as the 1:1 ratio.



According to analysts, the chart seems to indicate that (as of September 2008) Miami has corrected about 75% of the way to the eventual bottom, Los Angeles about 60%, and New York about 40%. Credit Suisse has interpreted this to show that home prices will decline until late 2009, then rents will gradually rise to bring the ratio back to 1. (but that is only one possible scenario)

Either way, we have a ways to go before the bottom.

[laughingwillow]

Interesting...

Thanks, mon.

lw