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House price developments and fundamentals in the United States

  • Andrea Finicelli


    (Banca d'Italia)

This paper discusses the limitations of the price-income ratio, the price-rent ratio, and of affordability measures as indicators of housing market conditions. For the purpose of assessing whether house prices are misaligned, the most sensible approach is to calculate the user cost of ownership and the implied theoretical ratio of house prices to rents, and compare the latter with the observed ratio. On the basis of this methodology, US house prices appear to have departed from fundamentals since 2004, cumulating an overvaluation of between 25 and 30 per cent by the third quarter of 2006.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 7.

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Date of creation: May 2007
Date of revision:
Handle: RePEc:bdi:opques:qef_7_07
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