Home Prices Headed Down

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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.

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Bill Conerly is principal of Conerly Consulting LLC, chief economist of abcInvesting.com, 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.