It is based on a typical house in bay area, although I saw similar ratios of numbers in many other houses all around Northern and Southern California.
The place I was renting last year had rent of $1650 for each part of the duplex. Total rent was $3300. The price for which the house sold this May was 1.2Million.
Price to rent ratio = 363.
Fair value of price to rent ratio = 120 (10 times yearly rent, this is what the real estate people use in normal markets)
Price to rent is out-of-whack by 3 times.
After the market corrects, I expect prices to correct equally in the other direction before stabilizing. The reasons are (i) when prices reach fair value, people will still be reluctant to buy because of previous history of decline, (ii) people will not have enough cash to buy and borrowing will be no-no at that time.
So, I expect price to rent to go to 40 at the bottom. For the mentioned house, price will be 132000.
Therefore, there will be 90% decline.
If all houses decline by 90% in prices around the state, and there is no civil war, I will be very surprised.
Expected time-frame of the decline - 8-10 years. Peak was in 2005. So, I expect the bottom around 2014-16.
Please sign me up for several condos and couple of houses near a beach. If this happens. I will pay good in commission.
Edited by skyymaster, 21 December 2006 - 02:57 PM.