Why Oh Why Can't We Have a Better Press Corps? (Elisabeth Bumiller/Robert Dallek/New York Times Edition)
Felix Salmon's First Golden Book of Collateralized Debt Obligations

The Housing Price-Rent Ratio

Paul Krugman writes:

http://krugman.blogs.nytimes.com/2007/12/28/housing-how-far-is-down/: [T]he housing-rent ratio... [is] comparable to the PE ratio on stocks... it fluctuated in a relatively narrow range until this decade, then took off for the wild blue yonder.... [I]s there any fundamental reason why this ratio shouldn’t go back to historical norms?...

Well, one thing has changed: interest rates, including mortgage rates, are lower, in large part because of huge capital inflows from China and other countries.... But is this enough to justify prices anywhere near current levels? I don’t think so — for three reasons. First, the math doesn’t work.... Second, the average is misleading... in “flatland”, where new housing can easily be built, real prices never rose much; the big rises have come in the “zoned zone,” where land and permits are constrained — and those rises... make no sense even given a maximum allowance for interest rates. Third, we won’t always get lots of free money from China.

So I come down to the view that the price-rental ratio will have to move most if not all the way back to historical norms. And that’s a long, long way down...

"A long, long way down" means, I think, "a fifty percent fall along the coasts."

I would cut that in half for two reasons: not 50% but 25% along the coasts, and much less in the interior. First, the likelihood that savings interested in being invested in the secure-property U.S. will be ample over the next generation is high: we will sell political risk insurance to foreign individuals and governments for quite a while yet. So real interest rates are likely to be lower in the past. Second, the zoned zone is not growing--and America's population still is. The gap between heartland and coastal values is likely to grow over time, and that anticipated capital gain should push up prices now.

Comments