Academic journal article ABA Banking Journal

Have Home Prices Stabilized?

Academic journal article ABA Banking Journal

Have Home Prices Stabilized?

Article excerpt

AFTER FALLING FOR THREE years, home prices on a nationwide basis have now rebounded for two quarters, according to the Case-Shiller national Home Price Index. Certainly this has been welcome news. But is this truly the bottom, the long awaited light at the end of the tunnel? Or is it just a temporary pause in a downward spiral?

Most efforts to answer this question have looked at various supply and demand factors affecting prices. High levels of inventory of unsold properties, rental vacancy rates, and unemployment, along with damaged household balance sheets, suggest that home prices could slip further. On the other hand, low mortgage interest rates, healing credit markets, and federal homebuyer tax credits have helped to spur demand. Moreover, at some point pent up demand is likely to be unleashed as signs of market stabilization and economic recovery emerge. An environment this complex and so heavily influenced by temporary federal policies makes it difficult to determine whether a long-run bottom has been found.

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To sort through this complexity, some techniques used in analysis of stock prices may be useful to help determine fundamental "fair value" for housing. Just as investors look at stocks' price/earnings (p/e) ratios, one can look at a similar home price/valuation ratio. In housing, the "earnings" is what the homeowner gains in not having to pay rent. Therefore, the trend over time in home prices relative to rents may provide perspective. …

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