Christopher Swann

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US houses overvalued no more?

By Christopher Swann
May 26, 2009

The US housing slump has passed an inauspicious milestone. The vertiginous two-year slide has now taken prices back to their 2000 level in real terms, according to the Case-Shiller index. Even in nominal terms we are back to 2002.

Set against the traditional yardsticks of rents and disposable incomes, house prices are now definitively undervalued. The ratio of house prices to disposable income is languishing at almost 20 percent below its average since the data series began in 1987, Capital Economics calculates. Compared to rents, house price are around 10 percent under their long term average.

Faith has seldom been lower in the tendency of markets to gravitate towards an equilibrium. So few are expecting the undervaluation itself to lead to a revival. Home values continue to be depressed by the large inventory of unsold properties. Even this inventory probably understates the problem since banks and investors may be keeping properties off the market until conditions improve.

 At the height of the boom, the housing market was around 35 percent overvalued relative to incomes, Capital Economics says. Left to its own devices, there is no reason that it should not become 35 percent undervalued. This argues for more decisive government action. Congress has been creeping only slowly towards effective measures to stem disclosures. The original Hope for Homeowners program was so restrictive that 8 months after it passed only one borrower had been helped into a cheaper loan. With the prospect of ever larger capital losses on mortgages, the financial services industry has become more accommodating – easing their opposition to government action to curb defaults. But they may need to adjust more quickly.

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