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Home Prices Headed Down

September 15, 2008

By Bill Conerly, Businomics, Conerly Consulting

Calculated Risk has a good post about home prices, looking at prices from several different angles.  All angles suggest that prices have a ways further to go before reaching “normal.”  Of course, there’s no reason to expect any time series to get back to normal, but it’s a good first guess. Why should housing prices be above their long-run normal ratio to something (rental rates, income) ? 

–Low interest rates are a good argument for asset prices of all types to be high relative to rental income and household income.

–There’s maybe a tax argument.  (If I own a house, I can finance my car with a deductible home equity line; if I’m a renter, my car interest is not deductible.)

— Land scarcity with a rising population.  I think that housing per se does not appreciate, but rather the land under the house appreciates.  The exceptions would be in no-growth communities.

In my judgment, that’s too weak a foundation for today’s home prices being as high as they are relative to the long-run norms.  But I’d be happy to listen to other reasons.


Bill Conerly is principal of Conerly Consulting LLC, chief economist of, and was previously Senior Vice President at First Interstate Bank. Bill Conerly writes up-to-date comments on the economy on his blog called “Businomics” and produces a monthly audio magazine available on CD. Conerly is author of “Businomics™: From the Headlines to Your Bottom Line: How to Profit in Any Economic Cycle”, which connects the dots between the economic news and business decisions.

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cc33 September 15, 2008

Land scarcity, that is the Metro area.

Check out this June 26th article from the Portland Tribune:
“Skyrocketing land values are contributing to increasing new home prices in the Portland area. According to a Portland State University study and interviews with area homebuilders, land prices have been increasing faster than home prices for the past decade. The increases have been especially steep since 2004, helping drive the median home price in May to around $285,000 in the Portland metro area, which includes Multnomah, Clackamas, Washington, Yamhill and Columbia counties. The increases are particularly sharp for buildable lots within Portland city limits. Developers say prices have more than doubled over the past few years, resulting in more existing houses being purchased and demolished to make room for new homes.”

Publius September 15, 2008

cc33: Well, that’s the problem we’ve been seeing in most of the big cities down south (California). It’s probably about time it caught up with Portland.

Brogan Modle September 15, 2008

Get rid of the gimmick loans and the housing market will right itself.

cc33 September 15, 2008

I couldn’t say it better.

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