Monday, November 05, 2007

Fortune Magazine to DC: Watch out below!

I received the November 17 issue of Fortune magazine Saturday. It has an interesting article entitled "Real Estate: Buy, Sell, or Hold?" The gist of the article is:

  • There's a long standing relationship between housing prices and rents in each real estate market.
  • Thanks to the real estate boom, the Price/Rents [P/R] ratio in most markets got out of whack.
  • Now that the boom has gone bust, the P/R ratios should begin reverting to their historic averages through a combination of falling housing prices and rising rents.

Fortune calculated the P/R for 54 markets and then determined how large a price decline would "bring prices back to their historical relationship to rents." For the greater DC area, they calculated that the P/R ratio in June 2007 was 26.0 while the 15 year average was 15.9. The magazine estimates that prices in the DC market have to fall 38.9% to "return to normal levels."

To further illustrate how bad it could get, they took the typical high end home and projected its price in five years [a high end home is defined as one selling for double the local median price]. Fortune estimated the typical high end home in the greater DC area sells for $856,000 today; in five years, they project it will sell for $641,000, a 25% drop.

I'll link to the article once [if] it hits Fortune's web site.


Brian said...

The article could have covered this, but the conclusion could also be reached that rents will increase. I know of several apartment complexes in our neighborhood with rents not far below our mortgage payment, for similarly a sized space; and our friends who rent have told us their rents have gone up quite a bit in the last few years.

Or maybe it's just my rose-colored glasses talking. I'm sure it's some combination of the two.

Keith said...

You're absolutely right, this is mentioned in the article.

Effectively, a combination of rising rents and falling home prices will force the P/R ratio to revert to its mean.

The rent that a property can obtain is a determining factor in valuing housing. Back in 2001-3, lower interest rates made owning cheaper than renting, hence the boom.

Unknown said...

Unlikely. The "repartments" and condos going apartment like Senate Square mean a return flow of rental units to the market, and price control. Sorry, but rents aren't going to shoot up like a weed to cover everyone's bubble prices.

FYI, very few of my friends have complained about rampant rate increases in Adams Morgan, Dupont or Cap Hill. They've stayed pretty much stable and standard.

Anonymous said...


it's definitely your rose-colored glasses.

Anonymous said...

The cheap interest rate made owning much more expensive than renting. Prices went to the moon, maybe further. Rents are going down and will go down giving the huge number of vacant condos (still waiting for a sucker) that are coming on the rental market. So, prices will fall down and rents will fall down. This could last few years. It is going to be long and painful.

Keith said...

Well, if we all believe that rents in the area will stay flat or go lower, then it bodes ill for housing prices. I know that my rent has not changed in more than three years [knock wood].

You're right - lower interest rates ultimately led to wildly out of whack prices. As someone said in a recent issue of Fortune [I paraphrase]: "It used to be the price of the asset dictated the financing; until recently, the financing drove the price of the asset."

Anonymous said...

referenced article available at

Keith said...

Great, thanks for the pointer.