How expensive is US housing?

residential real estate

Many observers (including myself) think that the housing market in the US began to bottom a little more than a year ago, as savvy property buyers began to return to key markets to pick up prime properties at prices they (correctly) thought would not go much lower.

Soon after midyear, overall housing-related indices began to bottom and then to rise.

Recently, signs of stabilization have emerged even in the worst-hit markets, like Miami, which suffered from wild speculation, massive overbuilding and heavy reliance on large multi-unit residential structures.  (In south Florida, unlike the case in most of the US, projects take longer to complete and when they’re done you don’t just have one unsalable detached house. You have maybe 100 unsalable condominium units.)

Despite all this good news, the question still arises whether this is simply an elaborate technical movement–sidewise price action based mostly on the market needing time to absorb the stunning depth of the declines of the past three years, but to be followed again by another fall off the table.

the Economist analysis

In a recent issue, the Economist observes these phenomena and addresses the valuation question.  For a variety of countries, it calculates the historical relationship between rental income and house prices.  It then uses this figure to figure what home prices should be, given today’s rents.  The results?

the US

1.  For the US, the magazine does three calculations.

Using the Case-Shiller ten-city index, house prices are 3.9% overvalued.

On on the Case-Shiller national index, house prices are 3.7% undervalued.

Taking the Federal Housing Finance Agency index, which eliminates anything financed with a sub-prime loan–in other words, is really biased to the upside–house prices are 13.1% overvalued.

If this simple measurement is close to correct, then the US housing market is on relatively firm footing.  It may not go up, but the floor is unlikely to disappear from beneath us.

undervalued markets

2.  Other fairly-/undervalued markets?

Japan, 33.7% undervalued

Germany, 14.6% undervalued

Switzerland, 7.1% undervalued

China, 2.7% overvalued.

I’m not sure where the data come for China.  This certainly cuts against the conventional wisdom, though, and lines up with the brave few who are arguing that the rise in property prices in the Middle Kingdom are just keeping pace with its rip-roaring economic growth.

overvalued markets

3.  Overvalued markets?

Australia,  56.1% overvalued

Spain,  53.4% overvalued

Hong Kong,  49.1% overvalued

France, Sweden, Britain and Belgium, all 30%+ overvalued.

Of  these, prices in Hong Kong, Australia, Britain and Sweden are rising.

what to make of this

The US, the first place where housing troubles emerged, appears to be most of the way back out of the woods.  This doesn’t mean that prices will be going back up much from here.  Who knows?  But it suggests that housing is not going to provide more negative economic surprises.

The undervalued markets are by and large in moribund economies.  China is an outlier.  It’s hard to know what to say about it.

The overvalued markets are split between fast-growing areas in the Pacific and the euro-zone.  Sounds like more potential trouble brewing in Euroland–as if they needed more.


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