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Fortune: Price-to-Rent Correction Forecasting

Over at the Baltimore Housing Bubble blog, site contributor Kevin has an interesting post up about a recent article in Fortune Magazine.

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.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

12 comments:

  1. 1
    on topic says:

    conceptually, this seems pretty reasonable, but just like there was a speculative premium when the market had had several years of impressive growth, people will expect to pay less than the 23X multiplier because the market will have had negative growth years.

    either that, or Seattle has changed as a market and is no longer the Seattle of 15 years ago, so it will move to whatever multiplier is more appropriate for a more prominent city.

  2. 2

    I think it is bold for Fortune to do a 5 year forecast. I thought it was an interesting article with a new spin, but I’m doubtful of their predictions. I try not to predict past 6-12 months – anything else seems foolish. Will the Presidential election change markets? Interest rates? How about changes in lending regs? War with Iran? War between India and Pakistan? Lots can happen in 5 years.

    When 5 years is up, what will Fortune say? “Well, there was a fundamental shift that no one could have foreseen..” Of course there was, that’s why such predictions are so tough.

  3. 3
    on topic says:

    sure, 5 yrs is a long way out, but they are talking about a ratio more than absolute values. it is pretty reasonable to assume that any external force (in terms of wars, general economic troubles, etc) will work on rents and house prices in roughly the same way.

    only differentiating forces, like changes in interest rates, will change the cost ratio of renting vs owning.

  4. 4

    THERE’S A LIMIT TO ALL RENTS IN SEATTLE

    It seems to be about $2000/mo right now, if it gets higher than this the rentor market totally dries up or is too intermittant and short-term. Also, the rentors become buyers.

    What does that mean? Irrespective of the statistical tool used to predict rents, with stagnating household incomes in America and Seattle, there’s a dollar limit the landlord can get.

    Will household average incomes rise in Seattle in the next few years? Doubtful, unless new domestic technologies emerge creating unique domestic job growth, something we haven’t seen in decades with this outsourcing phenomena.

  5. 5
    TJ_98370 says:

    Sorry Tim – Way off topic, but I could not resist posting this priceless find.

    Hundreds of thousands of people, including the author, have sold their homes under the patronage of St. Joseph, whose intercession they sought after burying his statue in their yard……

    Underground Real Estate Agent Kit

  6. 6
    rose-colored-ghoulaid says:

    Bold to predict 5 years out? I’d call it canny. When asking for research grants, it’s important to make predictions which are far enough out that nobody is really expecting results, but close enough to feel meaningful. That’s why all research will ‘come to market in 5-15 years’.

  7. 7
  8. 8
    george says:

    Although it’s probably too optimistic if housing tips us into a recession, that article just confirms the obvious.

    It’s a lousy time to buy. Renting isn’t a bad option. It’s also still a good time to sell. Unless you want to hang on forever, or want to chase a falling market down the rabbit hole.

  9. 9

    Not sure if I agree with George about it still being a good time to sell. It would be a good time to sell if there weren’t so many properties on the market, and if things were selling. Inventory is up, sales are down. Good time to sell if you can sell.

  10. 10
    TheDexter says:

    It’s nice to live in a town where it’s still possible to rent a waterfront property on Alki / Beach Drive SW for $1,150.00 a month, for a location worth just under two million dollars. Will it last for the renter? No. For the owner? Come on now.

  11. 11

    […] Fortune: Price-to-Rent Correction Forecasting […]

  12. 12
    Angie says:

    Tim linked to the Fortune article in today’s (11/8) post. Since the discussion there is trending toward his media appearances (looking forward to checking them out later!), I thought I’d weigh in about the article in question in this venue…

    The prediction from that article is, indeed, over a 5 year range. Their oracle predicts that house prices will fall ~20% over the next five years—AND, rather less easy to find among the numbers, that rents will rise that same amount in the next five years.

    If that does come to pass, I still maintain that Seattle will *still* be an unaffordable place to live.

    That $500K median SFH in the city will drop to $400K–but unless the median city income rockets up to $133K (from its current $70K for a family of 4, $56K for single people), that’s still unaffordable by traditional lending limits of borrowing 3X income.

    And the upward pressure on rents will make it harder for renters to get by, and for those who want to buy, to save for those down payments…

    In sum–I don’t think this is the kind of good news that you bubble dudes think it is.

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