House Price Developments and Fundamentals in the United States
27 Pages Posted: 17 Sep 2007
Date Written: May 2007
Abstract
This paper discusses the limitations of the price-income ratio, the price-rent ratio, and of affordability measures as indicators of housing market conditions. For the purpose of assessing whether house prices are misaligned, the most sensible approach is to calculate the user cost of ownership and the implied theoretical ratio of house prices to rents, and compare the latter with the observed ratio. On the basis of this methodology, US house prices appear to have departed from fundamentals since 2004, cumulating an overvaluation of between 25 and 30 per cent by the third quarter of 2006.
Keywords: house prices, affordability, user cost, fundamentals, bubbles
JEL Classification: R21, R31, G10
Suggested Citation: Suggested Citation
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