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New Index Suggests Where Prices Might Grow, Decline in United States

As homebuyers look for opportunities in the real estate market, a new price-to-rent ratio from researchers at ��õ������ and ��õ������ International University sheds light on which metropolitan areas might see price growth or declines in the United States.

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As homebuyers look for opportunities in the real estate market, a new price-to-rent ratio from researchers at ��õ������ and sheds light on which metropolitan areas might see price growth or declines in the United States.

Areas with higher price-to-rent ratios, such as the West Coast, are more likely to face future price instability, or declines, according to . However, areas in the U.S., like the East Coast, with lower price-to-rent ratios should see far more stability in property prices, or potential growth.

"Low price-to-rent ratios strongly suggest higher average returns to ownership,” said , Ph.D., real estate economist with FAU’s. “Thus, low price-to-rent ratios suggest it is better to own than rent on average in a particular market, and it is this increased demand for ownership that helps property price performance. The opposite is true for high price-to-rent ratios, which indicate renting on average is preferred to ownership and implies weakening demand, leading to less stable property prices.”

The monthly index, conducted by Johnson, along with researchers , Ph.D., of FIU’s and , Ph.D., dean of FIU’s , looks at the 100 most populated metros in the county and calculates the number of dollars in property price paid for each dollar in annual rent. Generally, a lower price-to-rent ratio, under 15, suggests that prices are stable and likely to grow. A higher price-to-rent-ratio, over 20, implies prices in the area are unstable due to lowering returns to ownership.

Cities in California and on the West Coast have some of the highest price-to-rent ratios in the nation. San Jose, California is 35.24; San Francisco, 29.52; Seattle, 25.96; Los Angeles, 24.95; Portland, Oregon, 24.40; and San Diego, 23.07.

“It is not surprising prices, until recently, have been falling quite significantly with property values down over 9 percent in the last 12 months in San Francisco,” Beracha said. “In general, once prices start to fall, they should do so until the local current price-to-rent ratio roughly equals the local historic average price-to-rent ratio.”

Many East Coast metros are showing signs for future price growth: Atlanta’s price-to-rent ratio is 15.65; Springfield, Massachusetts, 15.52; Orlando, 15.36; Tampa, 14.52; Cape Coral, 14.90; and Miami, 13.47.

“Cape Coral is producing one of the strongest buy signals in the country,” Johnson said.  “It’s current price-to-rent ratio of 14.92 is below its historic average, suggesting a significant return to ownership for the area. Miami metro’s price-to-rent ratio, combined with the area’s population influx and new household formation rate, implies the area should see stable price performance. The greatest threats to pricing in Miami are a significant decrease in mortgage rates, which would reignite prices, and a rapid increase in supply of new units, which could send prices tumbling.”

All three researchers have some concern over the apparent slowing population growth in South ��õ������, which could present problems down the line for price performance. Expected population growth has slowed noticeably: The tri-county area of Miami-Dade, Broward and Palm Beach is expected to see only a 6.8 percent expansion in its population over the next decade, while Orlando is anticipating an expected population increase of 22.5 percent, according to StatsAmerica.

 “However, that is a problem for another day,” Hardin said. “Right now, we are still dealing with an inventory shortage that is helping to create a major housing affordability problem across ��õ������.”

-FAU-

Tags: business | real estate