ReEconomist

Housing: Did We Learn Nothing from the Dotcom Bust?

Home prices got way disconnected from their fundamentals. In some areas they reached 10 times income levels. Now prices are correcting to be no more than 4 times income levels.

Another phenomena that might cause prices to over-correct on the downside is the waning enthusiasm for buying and owning a house.

With prices falling and not likely to appreciate anytime soon, a lot of people will be asking themselves why are they paying such a high premium for ownership over the cost of renting a comparable property? Up until the bust, most people would justify a premium for ownership cause they were getting a healthy amount for appreciation.

It's more expensive to rent assets that depreciate rather they buy them. Houses have been cheaper to rent than purchase because of the appreciation component. What happens to prices when the appreciation component buyers assign to a purchase is zero?

These days it's gotten difficult to ascertain whether there is a bottom forming or the bubble still has more to deflate. There will be a bottom and it could be the point where it becomes cheaper to rent then purchase.

Check out the home value forecasting tools based on time-tested fundamentals. Sell the Ceiling and buy the Floor. The Ceiling is the top level of prices where the income to home price ratio exceeds the historical norm for the area. So when prices reach or exceed the Ceiling, you'd be financially wise to sell and definitely not buy.

The Floor is the price level where buying makes sense due to the yield the rental income of the house could generate. If you buy the Floor there is limited downside risk to further price declines. UsHousingMeltdown.org/...