[5]By Bill Conerly, Businomics [6], Conerly Consulting [7]
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 [8], chief economist of abcInvesting.com [9], 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 [6]” and produces a monthly audio magazine available on CD [10]. Conerly is author of “Businomics [11]™: 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.
[12]