Home Prices – An Update
The August 27, 2008 comment about the price-to-rent ratio of homes (the price-to-earnings equivalent metric for homes) concluded that home prices were still at elevated levels as of the second quarter of 2008. There has been a significant decline in home prices since that commentary. The Case-Shiller Home Price Index fell 18.3% on a year-to-year basis in the fourth quarter of 2008 and extended the decline further to a 19.0% drop on a year-to-year basis in January 2009 (see chart 1).
At the end of 2008, the price-to-rent ratio (Ratio of the Case-Shiller Home Price Index and the Owners’ Equivalent Rent of the Consumer Price Index) showed a noticeable improvement (see chart 2), with the ratio in the fourth quarter of 2008 (107.97) closer to the long-term average of 98.05 (see table 1, which covers the period 1987-2001). The fourth quarter price-to-rent ratio is well within the range of the mean (109.77) of the entire historical period (1987-2008) which includes the go-go years of 2001-2008. The main take-away from this chart is that home prices are most likely to decline in the months ahead, given the elevated level of inventories; but the pace of decline will be assuredly small.
