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.