Home Prices ‘Significantly Undervalued,’ Should Renters Buy?
By Nick Timiraos
The Case-Shiller home price index shows that house prices haven’t hit a bottom, and they’ve fallen so far—another 7.5% in the first quarter from the previous quarter—that house prices are “now undervalued, possibly quite significantly,” writes Paul Dales, U.S. economist for Capital Economics. That’s raising an interesting question for potential buyers who’ve rented throughout the housing boom: Is it time to buy?
Home prices have returned to 2002 levels in nominal terms and to 2000 levels when adjusted for inflation. Looking at the historic ratio of home prices to rental prices, home prices are now 9% below the normal market value, the lowest since 1999. And using the measure of home prices to incomes, housing is 18% below its historical level, according to Capital Economics, the lowest such ratio since the Case-Shiller index began measuring prices 22 years ago.
Some markets have posted even sharper retreats. Prices in Detroit have fallen to their 1995 levels, according to housing analyst Ivy Zelman, the largest such drop among the 20 cities tracked by the Case-Shiller index, while Cleveland has returned to 1999 prices.
But buyers may hold back because there’s no sign that prices won’t keep falling. Rising unemployment could push values down, as could a rising shadow supply of foreclosed, vacant and unlisted homes. Economists have long expressed concern about prices overshooting on the downside, or falling below the point at which they’d return to equilibrium. Mr. Dales estimates another 5-10% decline in prices.
Rents, meanwhile, continue to fall, too, which helps balance the scales a bit in favor of those who continue to rent. While the buy-or-rent dynamics vary drastically from market to market, we’re curious if there are any readers who think now’s the time to make the jump from renting to owning.
blogs.wsj.com
Comments
Alternate Reality wrote:
Why would someone want to own in the current market environment? The inventory figures are as obstructed as SEC’s earlier investigation of Bernie Madoff. Banks are hiding more losses by not listing already foreclosed homes, and by delaying foreclosure process for borrowers who are already behind. There are borrowers who had not paid their mortgages for close to a year (great savings!), yet had not not yet received a notice of default. Banks simply do not care - the longer they can postpone the recognition of writeoffs, the better! Why would a potential home buyer consider purchasin in such market? If all current inventory were to clear, the prices were to fall another 50-60%, possibly more. What’s the rush? |
