Kevin at the Baltimore Housing Bubble blog has put some work into creating a "price correction" Excel table based on an article entitled How Low Can They Go? by Shawn Tully in this month's edition of Fortune Magazine.
More on the article from Kevin:
It combined extensive analysis of 54 metro housing markets with the combined work of Moody’s Economy.com, Fortune Analysts, PPR, & NAR. The basis of the article was to provide a snapshot of what the future of housing will look like in 5 years from June 2007. They determined a correction value (sometimes positive) by comparing present day price to rent ratios with the average of the past 15 years.Kevin welcomes feedback on his project that can be downloaded at the Baltimore Housing Bubble.
Here's a rent/buy scenario in Warrenton:
 | 7611 MOVERN LN WARRENTON, VA 20187 MLS #: FQ6581602 List Price: $2,000 |
| 7611 MOVERN LN WARRENTON, VA 20187 MLS #: FQ6438125 List Price: $529,000 |
7 comments:
That house in Warenton should rent for much less that 2K Monthly - IMHO!
We just rented in PWC, in a town MUCH "closer -in" (than Warrenton!!) for less than 2K Monthly & made the LL pay the 150.00 Monthly HOA fee.
Plus our neighborhood is in a spanky gated community right on the Golf course
And most important - not in Warrenton!
This is selling for 23 times annual rent, or at a capitalization rate of 4.3%. Forget it. In our townhouse community in Del Ray, units rent for $1,900 - $2,000/mo, and sell for $400-430K. These sellers are hoping that the Greater Fool falls into their lap. They're not alone.
While we wait for Tully's new article to be available on-line, here is a previous piece he did on the price to rent ratio from 2003:
http://money.cnn.com/magazines/fortune/fortune_archive/2003/12/22/356104/index.htm
I understand that Tully uses a "last 15 years average" p/r ratio in his current article. I would urge caution in using that ratio as a baseline for "normal" because half of the weight of the ratio comes from the last 7 bubble years. In reality, the long term p/r ratio is likely much lower.
try two for that link:
http://money.cnn.com/magazines/
fortune/fortune_archive/
2003/12/22/356104/index.htm
The Fortune article says that the price to rent ratio in the DC area must fall by 39% to be back in line with the average of the last 15 years. It suggests this will happen mostly through falling prices, but partially through rising rents.
Rising rents will surely play a part, but with the vacancy rate at record highs, i don't think rising rents will be a significant factor in correcting the p/r ratio.
In addition, as stated above the baseline of the last 15 years includes several bubble years. Back those out and I suspect our p/r ratio needs to correct by about 50% or so.
Either way big price declines will continue.
Apartment bldgs here in Alexandria City are going nuts trying to get people to rent - they've now resorted to day laborer hired sign twirlers - it must be a desperate situation!
Everyone at least has many signs/ballons out - a couple units near me are empty - why the drawdown in occupancy do you think?
Its just overproduction of rentals and conversion of condos to rentals. The local market is flooded with housing - not just to-own.
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