Tuesday, May 26, 2009

Is there any air left in the housing bubble, II


Economists try to identify bubbles (prices not explained as the product of trading by rational, self interested actors) by looking at long run equilibrium relationships. For example, in long-run equilibrium, consumers should be indifferent between renting and buying.
Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is maybe 85% complete as of Q1 2009 on a national basis. This ratio will probably continue to decline.

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