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 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.