Will house prices keep dropping?
I don't think much of the "buy low, sell high" model for house purchases. I think a house should be purchased as a place to live, in which case the main questions are whether you want to live there and whether you can afford it, not whether prices have hit bottom. Still, it's a question of interest to a lot of people, so I've been meaning to write an article on the topic. Happily, Vladimir Klyuev, an economist with the International Monetary Fund, has written it, so I don't have to.
There are a lot of ways to look at what the "right" level is for house prices. In the IMF Working Paper What Goes Up Must Come Down? House Price Dynamics in the United States, Klyuev looks at two of them: the supply and demand fundamentals, and an asset-market perspective.
It's worth reading the paper, but I think you can get most of the story from just this one graph:
The red line is the real (i.e. inflation-adjusted) cost of rent. The blue line is the real home price. If we can expect the costs of houses and of rent to return to roughly the same relationship that they had between 1970 and 2000--and I think we can--then it looks to me like house prices still have a long way to fall.
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