Real Estate: Rentals and Sales Prices Out of Sync

This simple graph from Nomura reveals how an index of rentals and sale prices for residential properties in the US moved completely out of sync during the first few years of this decade.

The base for the index is Q1, 1991 and as can be seen the correction is clearly under way.

Although there is no compelling reason why the two indices would have to move back into sync with each other, the chart does demonstrate that to restore the previously consistent alignment between the two variables, home prices would need to retreat by another 20%.

Comments

[huskerbob:]

Not a chart to make a realtor happy. The SF Federal Reserve looked at this divergence in 04 and assumed the lines would continue on their seperate and merry ways. They also assumed any correction to this price distortion would come from "slower house price appreciation". Maybe today they would change that to "faster house price depreciation". The NY Fed refused to see any evidence of a house price bubble in this same chart.
There is a compelling reason for the indices to move back into sync, as home prices and rent were affected by largely the same factors and will be again now that it takes more than a social security # to get a mortgage. I was going to write pulse instead of SS# but that probably wasn't required on all loans.

Apr 30 07:18 AM

[Landbuyer:]

Let's jus hope that it doesn't take a further 20% decline to get things back in line.

Apr 30 08:50 AM

[BlueFire:]

Or, we can raise rents by 20%. Rents are on the rise in many markets.

Apr 30 08:56 AM

[Tricky:]

I would love to see two more lines overlaid on that chart -- 1) ratio of house price to household income, and 2) housing affordability metric (to account for interest rates).

I would bet it would tell the same general story -- we still have a ways to go on the correction.

Apr 30 09:00 AM

[Tricky:]

It's a valid point to raise. Will be very interesting how the net national picture plays out -- rents are also falling in some markets. Also, anecdotal evidence shows that the anticipated increased demand for rentals w/ foreclosures has been blunted by people moving back in with family and more renters finding ways to share space (someone sleeps on the couch, or move from a single to a double unit).


On Apr 30 08:56 AM BlueFire wrote:

> Or, we can raise rents by 20%. Rents are on the rise in many markets.

Apr 30 10:20 AM

[mr_subprime:]

If you didn't have a social security number, Wells Fargo would get you one. It's called an FEI number. All those Mexicans with mortgages and no social security numbers......how do you think that happened???

Apr 30 10:34 AM

[evergreen16:]

This article is complete BS. According to the chart above, the House prices already fell entire 2% from the top.
Now, in reality, the drop is already more than these 21%, and prices have returned below 2003 levels. Looks like it's time to come up with some new charts! Because if you correct the House price curve, it will show you, that rents are already higher? Why don't you take it home as an assignment and show us some real data where rents stand!

Apr 30 12:29 PM

[Osterix:]

I could not figure out the chart. It did not make sense. Then I read your post. Now I feel better.
The numbers are in fact incorrect. Thanks


On Apr 30 12:29 PM evergreen16 wrote:

> This article is complete BS. According to the chart above, the House
> prices already fell entire 2% from the top.
> Now, in reality, the drop is already more than these 21%, and prices
> have returned below 2003 levels. Looks like it's time to come up
> with some new charts! Because if you correct the House price curve,
> it will show you, that rents are already higher? Why don't you take
> it home as an assignment and show us some real data where rents stand!

Apr 30 01:16 PM

[JK Corcoran:]

I would be very interested to see a chart similar to this on the commercial real estate market. It appears that a serious correction in this area is underway and may peak in September.

Apr 30 01:27 PM

[themackattack:]

This chart is interesting, but imperfectly drawn to draw a more accurate conclusion. If one extended the two trendlines out with the same slope/trajectory they are currently on, it would suggest that housing will fall another 10% by 2011, +/- 5%.

Still a significant additional drop, but only half what is depicted here....

Apr 30 02:35 PM

[huskerbob:]

Evergreen, you have a good point that the federal numbers provided do not reflect the significant drop in home prices we have experienced.
However, you can use the more accurate Case Schiller index and still see significant downside. Don't forget that rents are falling in many markets. We are not likely to see rents rise significantly unless income rises as well.

Apr 30 05:09 PM

[theseanman:]

Not on this planet.


On Apr 30 08:56 AM BlueFire wrote:

> Or, we can raise rents by 20%. Rents are on the rise in many markets.

Apr 30 07:42 PM

[bigmoney:]

.

May 01 12:38 AM

[markg:]

Evergreen makes a good point. To illustrate, I just bought a house via short sale in California, 2 miles from the ocean at a price shown on Zillow to be right at mid 2003 pricing. And this house would rent at or above the after-tax payment with 10% down.

One relevant point here is that you have to look at purchases on a case by case basis, and not make judgements based on national or regional trends.

May 01 01:04 AM

[mlonz:]

a couple of beneficial real estate tax provisions were passed at the time of the chart divergence. Mortgage interest became deductible, and a 250k exclusion from capital gains was enacted on your primary residence. Both of these are a HUGE advantage to owning.

May 02 12:51 AM

[PastTense:]

"Mortgage interest became deductible, and a 250k exclusion from capital gains was enacted on your primary residence. Both of these are a HUGE advantage to owning."

If you sell a house for less than you paid for it(an increasingly common situation), there would have no capital gains tax anyway.

May 02 06:33 PM

[ubuy2w:]

I know very little of the numbers behind the charts or what they portend. What I DO KNOW however is that many homes can be purchased in many markets that cash flow with 30 year fixed mortgages and 10% down I also know that unless rents collapse I will do just fine buying a 3 year old bank forclosure and getting a decent tennant.

May 03 10:18 AM