Where’s the bottom?

Have we hit the bottom of the real estate crash yet? Is it going to get worse? Should I wait to sell my home? What’s my house worth? All questions I continually field week after week from home owners. We could listen to the news all day, but we’re likely to get a conflicting opinion on each station. The question is what is the best economic indicator to determine real estate values?

I was reading a story in a November issue of Fortune Magazine entitled “How low can they go?” In it the author interviewed all of the top experts in the field and came up with one conclusion! The best indicator and the most reliable over time to guide home values is RENTS! This theory is right on the money. You see people will not pay much more monthly to own a home than they would to rent a similar property unless there was big pot of gold when they sold. In the last several years home prices have sky rocketed, but I can assure you rents have not followed suit. Thus there is a tremendous gap in the ratio of home prices to rents. Rents have always had a historical pull on home prices and until this ratio returns back to normal averages we’ll continue to see home values fall. Rents will also need to rise in the next several years to bring this equation closer to balance. Areas like Florida, Nevada, California and Arizona will be hit the hardest with falling home values because these areas had the largest disparity in the price/rent ratio.

What’s the mean for Colorado? Two things: One, the price to rent ratio was not as out of whack as the states mentioned above so the drop in home values won’t be as dramatic. For example, according to MLS data the average price of a single family home in 2006 was 317K and the average price in 2007 was 310K that’s only a difference of a little more than two percent. Two, home inventory is declining, unemployment in Colorado is low and interest rate are dipping into the 5’s …all good signs for recovery later this year.

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