Fortune Magazine

Where housing is headed

Fortune's exclusive calculations show that big declines are needed in markets around the country to bring home prices back to their historical relationship to rents.

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Here's Fortune's forecast for the value of an upscale home (one that sells for double the local median price) in five years.
House prices (thousands)
Metro area June 2007 Five-year projection
NATIONAL AVERAGE $436 $372
Orlando $522 $343
Miami $759 $514
East Bay, Calif. $1,562 $1,078
Tampa $444 $320
Baltimore $565 $408
Fort Lauderdale $731 $532
Palm Beach County, Fla. $760 $553
Las Vegas $611 $450
Sacramento $705 $521
Greater Washington, D.C. $856 $641
Los Angeles $1,107 $841
Jacksonville $393 $299
San Diego $1,211 $926
Long Island, N.Y. $947 $725
Phoenix $521 $399
Charlotte $406 $313
Norfolk $500 $387
Salt Lake City $464 $360
Richmond $462 $359
Orange County, Calif. $1,419 $1,104
Philadelphia $472 $370
Seattle $854 $687
Portland, Ore. $589 $476
North/Central N.J. $607 $512
Inland Empire, Calif. $791 $667
Milwaukee $445 $377
San Jose $1,669 $1,419
Raleigh $447 $381
New York $1,100 $950
San Antonio $302 $262
Atlanta $349 $305
Hartford $484 $433
San Francisco $1,732 $1,568
Honolulu $1,314 $1,204
Nashville $367 $342
Oklahoma City $256 $240
Denver $502 $474
Memphis $283 $269
Boston $834 $793
Austin $363 $347
Chicago $574 $550
Minneapolis $448 $434
St. Louis $304 $295
New Orleans $328 $321
Stamford, Conn. $988 $968
Pittsburgh $237 $232
Columbus $296 $295
Houston $304 $308
Dallas/Fort Worth $329 $334
Greater Kansas City $309 $314
Cincinnati $284 $301
Detroit $201 $215
Indianapolis $244 $262
Cleveland $249 $273
Here Fortune shows how much the price/rent ratios must fall to return to normal levels.
Ratio of home prices to annual rents
Metro area June 2007 15-year avg. % Correction
NATIONAL AVERAGE 22.8 16.9 -25.9
Orlando 23.8 14.9 -37.2
Miami 27.2 16.0 -41.1
East Bay, Calif. 50.9 31.6 -38.1
Tampa 21.4 14.5 -32.2
Baltimore 20.7 12.6 -39.1
Fort Lauderdale 24.5 15.7 -35.9
Palm Beach County, Fla. 27.1 17.6 -35.1
Las Vegas 27.9 18.9 -32.3
Sacramento 28.7 19.4 -32.2
Greater Washington, D.C. 26.0 15.9 -38.9
Los Angeles 26.7 16.0 -40.3
Jacksonville 20.1 14.3 -28.8
San Diego 34.0 22.4 -34.2
Long Island, N.Y. 24.5 15.7 -36.1
Phoenix 21.5 14.0 -34.6
Charlotte 26.2 18.2 -30.5
Norfolk 26.8 17.9 -33.3
Salt Lake City 24.1 16.3 -32.7
Richmond 24.9 16.8 -32.3
Orange County, Calif. 36.2 24.3 -33.1
Philadelphia 18.6 12.5 -33.2
Seattle 38.0 23.3 -38.7
Portland, Ore. 31.7 20.8 -34.3
North/Central N.J. 20.6 14.4 -30.2
Inland Empire, Calif. 27.5 18.8 -31.6
Milwaukee 24.2 18.1 -25.0
San Jose 42.5 27.2 -35.9
Raleigh 26.8 19.4 -27.7
New York 17.8 11.7 -34.6
San Antonio 17.7 13.5 -23.6
Atlanta 19.5 14.8 -24.0
Hartford 18.7 14.9 -20.0
San Francisco 38.2 27.4 -28.3
Honolulu 35.2 25.5 -27.4
Nashville 26.8 20.5 -23.8
Oklahoma City 15.5 12.7 -17.9
Denver 24.4 19.1 -21.7
Memphis 21.5 18.1 -15.9
Boston 23.2 18.0 -22.4
Austin 19.1 16.3 -14.5
Chicago 22.7 18.3 -19.7
Minneapolis 19.3 15.5 -19.8
St. Louis 16.6 14.0 -15.7
New Orleans 16.1 14.8 -8.1
Stamford, Conn. 26.4 22.0 -16.6
Pittsburgh 11.9 10.6 -10.9
Columbus 18.9 16.9 -10.4
Houston 16.5 14.3 -13.4
Dallas/Fort Worth 17.8 16.1 -9.4
Greater Kansas City 16.8 14.8 -11.5
Cincinnati 16.3 15.1 -6.9
Detroit 10.3 10.9 5.8
Indianapolis 15.6 14.9 -5.0
Cleveland 13.2 14.3 8.5
In most areas, rising rents and falling prices will bring the P/R ratio down; in a few markets, both rents and prices will climb.
Correction components
Metro area % Price change % Rent change
NATIONAL AVERAGE -14.6 11.3
Orlando -34.2 3.0
Miami -32.2 8.9
East Bay, Calif. -31.0 7.0
Tampa -28.0 4.3
Baltimore -27.8 11.3
Fort Lauderdale -27.2 8.7
Palm Beach County, Fla. -27.2 7.9
Las Vegas -26.4 5.9
Sacramento -26.0 6.1
Greater Washington, D.C. -25.1 13.7
Los Angeles -24.1 16.2
Jacksonville -24.0 4.8
San Diego -23.5 10.6
Long Island, N.Y. -23.5 12.6
Phoenix -23.5 11.2
Charlotte -22.9 7.6
Norfolk -22.7 10.6
Salt Lake City -22.5 10.2
Richmond -22.3 10.0
Orange County, Calif. -22.2 10.8
Philadelphia -21.6 11.6
Seattle -19.5 19.2
Portland, Ore. -19.2 15.1
North/Central N.J. -15.7 14.5
Inland Empire, Calif. -15.7 15.9
Milwaukee -15.3 9.7
San Jose -15.0 20.9
Raleigh -14.7 13.0
New York -13.7 20.9
San Antonio -13.2 10.4
Atlanta -12.5 11.6
Hartford -10.6 9.4
San Francisco -9.5 18.8
Honolulu -8.4 19.0
Nashville -6.6 17.1
Oklahoma City -6.4 11.5
Denver -5.6 16.1
Memphis -5.1 10.8
Boston -4.9 17.5
Austin -4.4 10.1
Chicago -4.2 15.5
Minneapolis -3.2 16.6
St. Louis -2.9 12.8
New Orleans -2.1 6.0
Stamford, Conn. -2.0 14.6
Pittsburgh -1.9 9.0
Columbus -0.4 10.0
Houston 1.4 14.8
Dallas/Fort Worth 1.5 10.9
Greater Kansas City 1.6 13.1
Cincinnati 5.8 12.7
Detroit 7.1 1.3
Indianapolis 7.3 12.3
Cleveland 9.9 1.4
Source: Fortune analysis; Moody's Economy.com; PPR; National Association of Realtors
Methodology

What are rents saying about home values today? To answer that question, Fortune worked with Moody's Economy.com to estimate adjustments needed to get prices and rents back in balance. According to our calculations, prices in most markets will fall by double digits over the next five years.

Here's how we reached that disturbing conclusion. We started with the median price of existing homes in 54 metropolitan areas, using numbers from the National Association of Realtors. We then compared those prices with the annual rent on similar properties - houses, condos, and apartments with the same number of square feet as the median-priced house in each market - using figures prepared by Property & Portfolio Research, a commercial real estate research firm. That gave us a price/rent ratio for each area. Economy.com then compared the current P/R ratio with its average over the past 15 years and calculated how much it would have to decline to return to its historical norm. The average drop for all the markets we surveyed is 28%.

But that's not the whole story. The adjustment doesn't come exclusively from a fall in prices - rising rents also help close the gap. To complete the picture, Economy.com assembled a forecast of rental growth in each market; the average rise in our 54 markets is a total of 12% over the next five years. So to reach the average correction of 28%, prices need to drop only about 16%.

Of course, that's still a big bite. And in many areas the outlook is far worse. In the major Florida cities, Orlando, Miami, and Tampa, prices need to fall 28% to 34%. It's a similar story in inland California markets such as Sacramento (-26%) and the East Bay (-31%). In East Bay boom towns like Walnut Creek, a four-bedroom house that might have fetched $1.56 million in the spring may go for less than $1.1 million in five years.

In a handful of cities, our formula suggests that prices will actually rise. Home values should increase slightly in Dallas, Indianapolis, Cleveland, and a few other locales the bubble missed. In Detroit houses are so cheap - the median is around $100,000 - that even a shift in the economy from disastrous to mediocre is all that's needed to lift both rents and prices.

You can see the results for 54 areas around the country in this table. We also show the impact of the projected adjustment on a typical high-end house - one that sells for double the local median price - and indicate what that price will likely be five years from now.

We specify how much of the adjustment in each area will come from rent increases, and how much from price declines. Our forecast assumes moderate economic growth and job creation, and fairly stable interest rates. An unexpected boom or severe recession, of course, would change the picture.

One more note about our methodology. The home prices we used are taken from June data. At that point prices in many areas had already declined from their peaks. Since then, of course, we've had the subprime crisis and credit crunch, which have put further pressure on prices. So in many cities and towns, they have already started on the painful path back to rational levels.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.