Housing market still on red alert, but there are signs of stabilization
The housing market – the epicenter of the credit crisis – has yet to stabilize: prices continue to decline; starts are at record lows, and are expected to fall further; and the inventory build in the existing home market remains at troublesome levels; and then there is the shadow-inventory that looms.
Since renting and owning a home are substitutes, economists often use the price (home values) to rent ratio to determine the relative value of home ownership. Generally, as the price-rent ratio rises above its trend value, then home ownership becomes more over-valued (the opposite is true for a lower than normal price-rent raio).
The chart illustrates the national price-rent ratio, which is calculated as the quarterly home price index (either OFHEO or S&P Case Shiller) divided by the Bureau of Labor Statistics’ owner-occupied price index. Into the third quarter of 2008 (the latest data point), home values were still very much overvalued compared to renting, indicating that national prices still have some downward momentum to go.
The chart illustrates the third quarter 2008 deviation of price-rent ratios across all 54 metro areas in the U.S. (the data come from this Time article, where about 2/3 of the way down, you will see the link, click here) relative to their 15-year averages. There is a sense of over correction in key cities, where the price-rent ratios in Cleveland, Riverside-San Bernadino, and Detroit are 18.7%, 16.7%, and 15.3% below their long-run averages. These markets would be considered hot buys in normal economic times.
Originally published at the News N Economics blog and reproduced here with the author’s permission.
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