A study featured in the January 3, 2008 edition of The Wall Street Journal indicates that national housing prices would need to fall by 15% over the next five years, while rents would need to increase by 4% per year in order for the historical relationship between the two to return to a normal level.
The historic rate of average annual rents to average home prices since 1960 is about 5% to 5.25%. The ratio at the end of 2006 stood at 3.48%.
Just because the ratio is still out of line with it’s historic average doesn’t necessarily mean that home prices will continue to decline. It may take a number of years for this differential to correct itself, but I think it is something that a potential home buyer should consider.
Source: Wall Street Journal
Home Prices Must Fall Far
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