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

Finicelli, Andrea, House Price Developments and Fundamentals in the United States (May 2007). Bank of Italy Occasional Paper No. 7, Available at SSRN: https://ssrn.com/abstract=1014576 or http://dx.doi.org/10.2139/ssrn.1014576

Andrea Finicelli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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