House prices still too high compared to rents

House prices have still a long way to fall.....

A new study conducted by Morris Davis, a former staff economist at the Fed, and Andreas Lehnert and Robert F. Martin, two current Fed economists, shows there is an unprecedented divergence between rents and home prices. Between 1960 and 1995, rents and house prices rose at relatively the same rate. Rents fluctuated between 5 percent and 5.5 percent of home prices during this period.

In 1996, the market started to change. House prices climbed rapidly--much faster than rents. Within ten years, the cost of buying had more than doubled. The cost of renting did not. By 2006, the rent-price ratio fell to the historically low level of 3.5 percent--approximately 30 percent less than its long-term average.