Wednesday, January 9, 2008

Real Estate Update

"U.S. house prices 'likely would have to fall considerably' to return to a normal relationship with rents says a study by one former and two current [Fed] economists. The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly. ... Of course, the link between house prices and rents can remain out of whack for years", WSJ, 3 January 2008.

"For the first time in four years, the national vacancy rate for office buildings rose in the fourth quarter, as an unusually large amount of new space came on the market and tenants shied away from signing new leases. ... Only last summer, commerical brokers were warning tenants that they needed to sign leases quickly at top rents because space was scarce", WSJ, 7 January 2008.

The rental-sale ratio indicated California real estate was overvalued. Over about the last 500 years, house prices have averaged about 110-120 months rent. At its peak, Southern California's ratio was 210. It was like buying technology stocks at 100X earnings. A likely way to lose money. Posts worth reading on these items are at on 2 and 6 January 2008. In a 29 Ocotber 2007 post, I referred to an article by Jeremy Siegal, a Wharton professor, about the dangers of buying high PE stocks. Similarly, it's dangerous to buy "high PE" real estate.


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