This months edition of Fortune Magazine (November 12, 2007) had a great article on housing called How Low Can They Go? by Shawn Tully (no online link available yet, but I’ll modify post once it is). It combined extensive analysis of 54 metro housing markets with the combined work of Moody’s Economy.com, Fortune Analysts, PPR, & NAR. The basis of the article was to provide a snapshot of what the future of housing will look like in 5 years from June 2007. They determined a correction value (sometimes positive) by comparing present day price to rent ratios with the average of the past 15 years.
The post includes a link to an Excel spreadsheet that allows you to play around with the numbers for each of the 54 metro areas. According to the analysis, the Seattle area’s present price to rent ratio is around 36, while the 15-year average is 23. In the hypothetical 5-year correction described by Fortune, home prices would decline by roughly 20%, while rents increase approximately 19% (neither of those percentages account for inflation).
It’s a pretty interesting tool. I’m still inherently skeptical of “analysis” done by Moody’s Economy.com, but it’s interesting to play around with the spreadsheet nonetheless.