Even as states ramp up incentives, the payback for homeowners remains elusive.

The race is on to install solar panels in American homes thanks to generous government incentives such the $3.2 billion solar initiative California launched in January.

Despite the minuscule amount of solar power generated today — roughly one-thirtieth of 1% of all the electricity produced in the U.S. — recent technological advances and a continued decline in the price of solar systems are prompting more homeowners to ask if this renewable energy source is now worth the investment.

Analysts say they are still crunching the numbers when it comes to deciding whether residential solar systems, also referred to as photovoltaic or PV systems, make economic sense. The answer hinges on how much and how fast solar can cut a homeowner’s utility bills and thus how long it takes to pay off the initial investment to add solar panels to a home.

“When consumers contemplate the purchase of a system for their home, they approach it like any other financial investment and examine the set cash flows and expected return,” according to a new report from CIBC World Markets on residential solar.

Like any large-scale purchase, consumers considering solar tend to initially focus on the upfront costs. Solar systems for homes begin around $25,000 but can easily go higher depending on the size of a house and the amount of power they generate, said Rhone Resch, president of the Solar Energy Industries Association.

Electricity prices matter

A key factor in figuring out how long it will take to become profitable with a switch to solar is the cost of electric rates for a home, said Jeffrey Bencik, an analyst with Jefferies & Co. Bencik said retail electricity prices can vary from a low of eight cents a kilowatt-hour in some parts of the U.S. to as high as 18 cents in parts of San Diego.

“You really have to do the math on a region-by-region, house-by-house basis,” Bencik said.

BP Solar offers a handy calculator for homeowners thinking of installing solar power. The calculator uses a ZIP code and a current estimate of a home’s monthly electric bill to calculate what it would cost to install a system, along with the rebates that are available. Check out the calculator.In New Jersey, for example, a 10-kilowatt residential solar system is estimated to cost about $77,500. After a state rebate of $38,000 and a $2,000 federal tax credit, the out-of-pocket cost to the homeowner is $37,500. That will provide an estimated annual savings of $1,500 on electricity bills.

The payback period for such a system is roughly 25 years at current utility rates, according to estimates provided by the New Jersey Board of Public Utilities.

The payback period can drop to about 10 years if a system owner sold $2,400 a year in solar renewable energy certificates to electric suppliers that are required to generate a certain portion of their power from renewable energy sources. The certificates are doled out each time a solar system generates 1,000 kilowatts of power. The average residential electricity customer in New Jersey uses about 700 kilowatt-hours per month, or 8,300 kilowatt-hours per year, according to the New Jersey Board of Public Utilities.

Homeowners typically move about once every seven years, according to Census Bureau data. But these incentives hold appeal mostly for those who plan to stay in their current houses well beyond that average.

All eyes on California

CIBC looked at the likely payback for residential solar systems installed in California, the country’s largest solar market, and considered the cost of solar systems along with government-sponsored incentive programs and electric rates. The returns, it said, were “less stellar” than incentives offered in other countries.

CIBC estimates that the cost to install a system in California is about $8.50 per watt. But after a $2.20 per watt state rebate and a $2,000 federal tax credit the net cost drops to $5.77 a watt.

This means that buying a solar system can yield homeowners a 6% return on their investment. It would take about 16 years to pay the initial investment, though the payback period can vary depending on peak electricity rates in the region, the report’s authors said in an interview. If homeowners are generating power during peak daytime demand when electricity rates are typically the highest, they will save more money.

Some states also have net metering, which allows homeowners to sell extra power they produce back to their local utilities, potentially lowering the payback period. Ideally the payback period needs to get down to the “lower double digits or the high single digits” to attract more investors, said Jeff Osborne, an analyst at CIBC and author of the report.

“We believe system costs would have to continue to come down in order to make a (photovoltaic) investment in California more attractive and spark significant growth there,” the report said. The rule of thumb for investors is finding a 10% return and a payoff period of 10 years, said Osborne.

Osborne added that “the economies completely change” for someone thinking of putting solar on a newly built home rather than retrofitting an older home, since the cost of the solar system will be marginal compared with the overall price of the home and can be tucked into the mortgage without raising overall payments too much.

Incentive programs

For many customers, the refunds and tax breaks available from utilities, states and the federal government play a key role in the decision to go solar, analysts said.

Rebates and incentives vary by state. New Jersey is the second largest solar market in the U.S. and offers homeowners up to 50% in rebates toward the purchase price and installation cost of a solar system. The rebates used to be as high as 70%, but increased interest led the state to reduce them in order to accommodate more applications, said Doyle Siddell, a spokesman for the New Jersey Board of Public Utilities.

At the end of the third quarter of 2006, nearly 800 residential and commercial solar systems had been installed under New Jersey’s program, compared with 493 for all of 2005, according to figures provided by the state. In 2001, the first year of the state’s Clean Energy Program, there were only six solar installations. The increase “has been drastic and dramatic,” Siddell said.

Arizona is also generating interest among investors as a “model location” for solar due to the high number of hours of sunshine the state experiences and its existing solar electric infrastructure, according to a report on Arizona’s solar future prepared by Navigant Consulting for state officials and released in January. Arizona utilities offer homeowners incentives of as much as $3 per watt to install residential solar.

California is the dominant U.S. solar market, with 73% of the systems tied into the U.S. power grid in 2006, and the state has made a big solar wager. Gov. Arnold Schwarzenegger last year signed legislation funding the installation of 1 million rooftop solar panels for homes, businesses and schools. These systems will generate 3,000 megawatts of power for the Golden State and eliminate 3 million tons of greenhouse gas emissions, the governor says.

In California, close to 21,000 PV systems were installed and connected to the power grid by mid-2006, representing approximately 174 megawatts of power, according to a report by the Northern California Solar Energy Association. The California Energy Commission processed 11,734 PV incentives between 1998 and 2004, or an average of 163 per month. From January 2005 through June 2006, the commission processed 13,714 incentives or about 762 per month, the report said.

Utility bills as incentive

Research from Jefferies predicts more incentives will attract more solar buyers. “The U.S. incentive programs are continuing to proliferate. . . . We expect these programs to continue to drive significant increases in installations,” analysts at the firm said in a new report evaluating clean technology.

Resch, who used a 50% grant from the District of Columbia to install a solar system on his own home, agrees that it is essential for installation costs to come down for solar power to have wider market appeal. Resch said the goal of the industry is to achieve an installed cost for consumers of about $3 per watt. He pointed out that solar costs have come down about 85% over the past 20 years and said growing demand will continue to bring them down.

Analysts believe that if consumers continue to focus on rising monthly power bills, they will increasingly turn their attention and dollars to residential solar. Analysts at Signal Hill stress that consumer utility bills — which are driven predominantly by coal, natural gas and nuclear costs, and not oil — will drive demand for residential solar.

In some parts of the country residents have seen rates rise as much as 70% in recent years.

“Solar demand and appeal is driven by comparative residential or commercial electricity costs,” Signal Hill said in a recent report. “We think consumers (or retail solar-PV system) buyers will make the right choice and remain focused on their utility bill.”

By Stephanie I. Cohen, MarketWatch

Consider that roughly two-thirds of a home’s annual energy use goes toward space and water heating, that in most American homes, winter heating is responsible for sending nearly four tons of greenhouse gases into the air each month, and that as much as half of all the energy used in the home is wasted. Efficient heating is starting to sound pretty good about now, no? Heck, we haven’t even mentioned the political implications of heating oil. Below, TreeHugger has compiled some tips to cheaper, greener heating, all of which are driven by the two fundamentals of a treehugging life – being more efficient, using less, and doing it in style.

Top 10 Tips
Here are 10 highly effective ways to go greener. Hit it.

1. Seal the leaks!

Sounds dull we know, but heat loss is one of the biggest obstacles on the road to a comfortable home in the winter. Good thing that sealing those darn leaks – or draftproofing, to get technical – is a breeze. Plus, come summer time, good insulation will make it harder for heat to beat a path way into your home. All you need is a tube of exterior silicone caulk or insulation strips, which you can take to your windows, plumbing and wiring holes, doors and fireplace dampers. To find the leaks, light a stick of incense or a candle on a breezy day, close all the windows and doors, and wander around your rooms searching for places toward which the incense smoke drifts. Those are your target zones. For the space between your doors and the floor, consider installing a nifty, cheap door sweep on the bottom of the door. For information on more serious insulation projects, see the Dept. of Energy’s in-depth site.

2. Cover your glass

Installing clear plastic barriers or storm windows on your existing windows can cut heat loss by 25% to 50% by creating an insulating dead-air space inside the window. Storm windows cost about $7.50 to $12.50 per square foot. Exterior storm windows will increase the temperature of the inside window by as much as 30°F on a cold day, keeping you more comfortable.

3. Stay ventilated

The better you draft-proof and insulate your home, the more you’ll need good ventilation. Pollutants (especially from unflued heaters) can accumulate and excess condensation can cause mould and mildew to grow. Open some windows for a few minutes several times a day (cross-ventilate, if possible), rather than leaving a window partly open all the time.

4. Spread the heat

Who knew a fan could be useful for heating your home? Turns out that a well-positioned and slow-rotating fan can help ensure that heat from your radiator or heater doesn’t just drift up to your ceiling but spreads throughout your room, warming you toe to head. One great option is a heater fan, which sits atop woodstoves or gas room heaters and relies on a thermodynamic module to keep them running on heat alone (look ma, no batteries!).

5. Heating wisely

Heating the rooms to tropical temperatures isn’t just unnecessary, but uncomfortable. Throw on your most comfortable sweater and turn your thermostat down a few degrees. Each degree Celsius less will save about 10% on your energy use. And don’t forget to close doors to keep the heat contained in the rooms you’re actually using. Also, reduce temperatures at night, when you’re under the blankets. A programable thermostat might be your most effective weapon.

6. Peel a drape

Since most heat loss in your home occurs through and around the windows, draw your drapes, especially at night. During the day, leave south-facing windows uncovered in order to take advantage of the winter sun. If you can line your drapes with old bed sheets or other material, they’ll prove even more effective in cutting down on your heating costs. You can also buy insulating drapes, which incorporate layers of insulating material, a radiant barrier, and a moisture-resistant layer to prevent condensation.

7. Start a fire (but not like a caveman)

What are fireplaces good for? Gathering the family around, hanging stockings on, putting photographs on top of. And what are they not good for? Entering the house (unless of course you’re Santa), throwing trash into, and heating. Yes, heating. On average, fireplaces are only about 10% efficient. That is, about 90% of their energy is lost through the chimney, along with loads of your home’s warm air and energy dollars. As the Dept. of Energy says, they “should not be considered heating devices.”

But if you can’t resist the crackle and the glow, lower your thermostat to about between 50° and 55°F so your system doesn’t keep trying to replace the warm air being lost through the chimney. Also, open the window nearest the fireplace slightly and close nearby doors so the fireplace won’t easily draw heated air out of the house. Installing glass doors on the fireplace, which can be closed when the fire’s dying or out, will prevent indoor heated air from escaping through the chimney, as will closing the chimney damper when the fireplace is not in use. Consider using EcoBrics http://www.naturbrennstoffe.de/, which, made of compressed sawdust, have the same energy value as brown coal equivalents, with one-third the water content and a fraction of the ash and sulfur emissions.

Some upgrades to consider are the EcoFire Super-Grate, which increases burning efficiency, an outdoor air intake, which cuts down on heat loss from your home, or a high-efficiency fireplace insert, offering stricter air control.

If you don’t use your fireplace at all, plug and seal the chimney flue. You can keep your family photos where they are.

8. Getting into (cheaper) hot water

Water heating is the third largest energy expense in an American home, typically accounting for about 13% of your utility bill. There are four ways to cut your water heating bills: use less hot water, turn down the thermostat on your water heater, insulate your water heater, or buy a new, more efficient water heater. To use less, consider aerating faucets, which enhance spray while minimizing water usage, repair leaky faucets, and opt for showers over baths. To insulate your heater, you’ll need blankets that shouldn’t cost more than $20 and will save you around 4-9% in heating costs. Remember not to cover the thermostat; if insulating your hot-water storage tank, don’t cover the thermostat, top, bottom, or burner compartment. See the DOE’s great page on the topic before insulating your heater, storage tank, or piping.

9. Be passive

So-called “passive” techniques earn their name from being unobtrusive, requiring little tending or cost. But they’re anything but passive when it comes to heating your home. Installing larger, insulated windows on south-facing walls and locating thermal mass, such as a concrete slab floor or a heat-absorbing wall, close to the windows, will help your home absorb solar heat with a minimum loss of inside heat. Keep in mind that for passive solar heating, the optimal window-to-wall area ratio is 25-35 percent. Ensure also that your south-facing windows are clean, and that objects do not block the sunlight from hitting concrete floors or other heat-absorbing materials. If you’re constructing a new home, make sure the longest walls run from east to west, allowing the sun’s rays to enter the home in winter, while allowing in as little sun as possible during summer.

10. Cuddle up

Or throw a get-together, and tell everyone to wear their coolest (no pun intended) sweaters. The more people in your home (or bed!) the hotter it is. Gather around the fireplace – but if you’re cold, think twice before actually lighting it up. No matter what, sweeten the deal with some hot cider or cocoa!

article found: http://green.msn.com/articles/article.aspx?aid=80

30-year, fixed-rate loans averaged 6.07 percent   WASHINGTON – Rates on 30-year mortgages fell last week to the lowest level in a month as investors found new reasons to worry about a possible recession.Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.07 percent this week.

That was down from 6.17 percent last week and was the lowest level for 30-year mortgages since the week of Dec. 6 when they fell to a two-year low of 5.96 percent. That marked the only time that the 30-year mortgage was below 6 percent last year.

Analysts attributed the decline in part to some weaker-than-expected economic reports. The Institute for Supply Management reported that its closely watched gauge of manufacturing activity dipped to the lowest level in nearly five years.

Frank Nothaft, chief economist at Freddie Mac, said that the fall in the manufacturing index could possibly be a “harbinger of a more substantial economic slowdown” at the start of this year. Already, forecasters believe economic growth will slip to a barely discernible annual rate of around 1.5 percent this winter and early spring as the economy feels the impact of the severe slump in housing and a credit squeeze that hit last August.

Housing, which had enjoyed a five-year boom of soaring prices and record sales, has been in a severe slump which economists predicted will continue into 2008.

Nothaft said he predicted that sales of both new and existing homes will be around 5.09 million this year, down by more than 11 percent from 2007.

“Our latest forecast has total home sales continuing to decline in the first quarter of the year before starting a slow recovery,” Nothaft said.

Other types of mortgage rates also experienced declines this week, according to the Freddie Mac survey.

Rates on 15-year mortgages, a popular choice for refinancing, dropped to 5.68 percent this week, down from 5.79 percent last week. Rates on five-year adjustable-rate mortgages declined to 5.78 percent, compared to 5.90 percent last week. Rates on one-year ARMs fell to 5.47 percent, down from 5.53 percent last week.

Harder-to-get credit has made it more difficult for some would-be home buyers to secure financing for home and other big-ticket purchases. The more restrictive credit situation has deepened the housing slump.

The mortgage rates do not include add-on fees known as points. Thirty-year, five-year and one-year mortgages each carried a nationwide average fee of 0.5 point. Fifteen-year mortgages had a fee of 0.6 point.

A year ago, 30-year mortgages stood at 6.18 percent. Rates on 15-year mortgages were at 5.94 percent while five-year adjustable-rate mortgages averaged 6.02 percent and one-year ARMs were at 5.42 percent.

© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

URL: http://www.msnbc.msn.com/id/7148582/

Plus, trends that are on the way out and tips to keep your house current

Housing trends sail by faster than most of us have time to notice, but when it comes to selling your house, you might suddenly wish you’d sat up and paid attention before. Some styles can be put down to the vagaries of fashion and are easily fixed – gaudy wallpaper isn’t difficult to replace, but moving a laundry room above ground or fitting a proper staircase is another story entirely.

Here’s a list of the big no-no’s, the relics that make a house unsellable:

Small houses
Small is not the new big I’m afraid, at least not yet anyway. People like to have space to live in and a very small house can deal a serious blow to your possible asking price. If you can’t afford to physically increase the size of your house, you need to do everything possible to make it look bigger.

One bathroom
We don’t want to wait to use the bathroom. Not any more. With so many people used to the luxury of multiple bathrooms, it is a hard sell to get them to take a step backward in time.

No air conditioning
Installing central air to your house will cost you about $10,000-$12,000, but if there was ever a juicy bone to get a buyer interested, this is it.

Fuse boxes
Fuse boxes? People expect circuit breakers nowadays, and if you want to modernize your electrics, consider spending $2,000 to replace those outmoded old fuses.

Spiral staircases
Pretty for sure, but the novelty has long worn off. Ever tried carrying a sofa up a spiral staircase? If you have, you’ll know why they might put your average buyer off.

Basement laundry rooms
What a nice idea that was, why not stick those cumbersome noisemakers down in the basement out of sight? Because ever since we did, washing clothes has meant a trek into the dank recesses of our houses. Doing the laundry is so much more appealing when the washing machine is within spitting distance of the clothes to be washed. If you have the space upstairs, it’s time to accept those big old machines back into the fold.

Popcorn and stucco ceilings
Talking about the vagaries of fashion: No one wants to see these any more. Smash them off with a big stick if you have to.

Basements with outside access only
You’re in your pajamas, it’s a cold winter night, rain hammering against the windows and suddenly you remember. You left your groceries in the basement. Curse this house and curse all who live in it! People don’t want to go outside to get into their basement.

In addition to the absolute stinkers when it comes to selling a house, there are several trends on their way out that you may want to avoid:

McMansions
They may be big, but they aren’t clever. Think before investing in one of these: Do you really need all that space? An increasing number of people are deciding they don’t. Quality trumps quantity every time.

Separate living and dining rooms
When was the last time you sat down and had a meal in your dining room? If it was recently, you belong to a dying breed. People want to properly utilize all the space in their house, and in this pursuit, the dining room is casualty No. 1.

Small master baths
“Small” and “master” – they just don’t go, do they? How can you be king of your bathroom if your bathroom is the size of a queen-size bed?

Standard-size garage doors
Squeezing an SUV through old-style garage doors is like fitting a coconut into a pea pod. It isn’t happening. Though 7′x9′ used to be acceptable, nowadays you want to shoot for 8′x10.’

Football-size decks
Decks have been the must-have accessory for a good 10 years now, and demand shows no sign of slowing down. What has changed though, is the extent to which people want to replace garden with decking. A deck can take away as much as it can give to a garden, so before plumping for the largest deck imaginable, think about exactly what you’ll be using it for and weigh this against how much you and future owners would value the garden itself.

URL: http://www.msnbc.msn.com/id/22544275/

By Barbara Corcoran

Who doesn’t want to own a first-class, destination-quality vacation home without dealing with homeowner headaches and without paying for months of non-use?My most recent article covered the flavors and details of fractional ownership, a best-of-both-worlds ownership structure that reduces costs, yet allows you to enjoy a bundle of first-class amenities.

Now I’m back from the Millionaire Zone to describe a slightly different form of fractional ownership: Shared ownership.

You were intrigued with the range of fractional ownership styles I described, from timeshare-style condo developments to Private Residence Clubs to the posh jet-set Destination Clubs.

But those developments are just that — developments. Massive resort communities of residences, usually set around a golf course and other resort-like amenities.

Just a house, ma’am

You just want a vacation home. A house. A unique structure, constructed like a house, set like a house, decorated like a house. Space and location are important. By the lake, by the beach, in that secluded wooded setting you’ve always coveted.

But say that coveted vacation home is in the North Shore area of California’s Lake Tahoe. On average, it would have set you back $885,335 in 2006. Yikes.

And that’s “on average.” A house in a particularly desirable location would have cost substantially more.

Share with friends, family?

You can see where this is going: Suppose you were to share the ownership of that home with someone else, perhaps with two or three other families. That would drive the cost down, and you’d still have a home to enjoy for three months out of the year or more.

You begin to think: Can I enter such a partnership with someone in my circle of friends and family? We’d share the cost, and it might be fun to have a few weeks or weekends together so the kids can run wild.

But you think about it some more, and some potential issues come up. Everyone has to agree on everything: What to buy, when to buy, how to decorate, how to manage, and when to sell. Finding “friends and family” with the same tastes and checkbook might be a daunting task. And such arrangements can easily lead to these folks becoming friends no longer.

Find a common tenant

A handful of smart realtors in the U.S. have embraced this need and now specialize in selling shared ownership arrangements.

They buy unique, individual homes, and sometimes high-end condos, then sell shares in those properties, usually to two to four buyers. Some shared arrangements carry shares as small as one-eighth.

Technically, the “share” is a tenants-in-common ownership. Investors and corporations have long used the TIC form of ownership to buy everything from commercial properties to executive jets. In the case of shared vacation-home ownership, each TIC arrangement is set up as a custom contract by the real estate agency.

The TIC arrangement allows tenants access to the entire property (not just their “share,” e.g. two rooms upstairs) and allows ownership transfer on death to designated heirs (as opposed to joint tenancy, which calls for transfer to other owners).

Jeff Cutler, a practicing real estate attorney, founded and manages one of the leading agencies, Dreamslice International, headquartered in the Lake Tahoe area.

Having an attorney at the helm makes sense, because each TIC contract is arranged according to the needs of the common owners. An administrative fee is added for a customized menu of services, including everything from basic maintenance and property management to scheduling to what Cutler calls “full concierge” service, where your skis are waxed and tuned and waiting for you when you arrive.

The fees might run $100 to $150 per share per month, but can run higher depending on the service level and number of owners. The greater the number of shares, the higher the fees, because more cleaning and scheduling work is typically required.

Can you rent out your share or use it as an investment property? It depends on how the contract is set up. According to Cutler, most higher-end properties are not set up for rental; the owners simply don’t need the income.

The combination of large fractional share and clear TIC ownership is typically enough to draw favorable real-estate financing, although the lending market still hasn’t fully embraced fractional ownership. Specialists in the field, including Cutler, say that will change.

Advantages of shared ownership

It isn’t hard to see the advantages.

• Affordability. As an example, a one-fourth share in a four-bedroom Tahoe view home goes for $299,000, obviously far less than you’d pay outright. See sample listing on Dreamslice.com.
   
• Shared costs. Taxes, maintenance, insurance, snow removal, financing costs. The agency manages these things so you don’t have to.
   
• Deeded ownership. As with all fractionals, you own something that can be bought, sold, borrowed against, or transferred to your heirs.
   
• Business relationship. No arguing with your in-laws about whether your mounted deer trophy can go over the fireplace, or whether they paid their share of the snow-removal costs.
   
• Flexibility. You can sell whenever you want, or you can buy out your common tenants as time goes by. Shared ownership can be a great way to get your foot in the door.
   
• Expanded possibilities. If you’ve got more to spend, consider owning more than one share in different homes in different places. You can get more than one vacation home experience for less than the price of one.

Naturally, there are downsides. Like other fractional developments, you can’t decorate as you please. You can store some stuff, but not as much as if you owned outright. Shared ownership doesn’t usually offer the country-club style amenities you might get with some fractional arrangements. And everything you do to the place — or in it — is governed by some kind of agreement.

Also, the idea hasn’t yet matured enough to provide much choice in home selection or in agencies managing the deals. Dreamslice is a leader in the field, but has only been around for a year-and-a-half. For broader U.S. coverage, Halfshare.com is also worth a look.

I see shared ownership serving the needs of many busy professionals and retirees. The idea will catch on, and soon it’ll be easier to grab your slice.

By Jennifer Openshaw
From MarketWatch

 U.S. house prices “likely would have to fall considerably” to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

Of course, the link between house prices and rents can remain out of whack for years.

The U.S. study is by Morris Davis, an economist at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed.

The authors’ methodology was based in part on previously published work by Fed economist Joshua Gallin. The same approach is used by many other analysts, including the Congressional Budget Office, which arrived at similar conclusions.

In an interview, Mr. Davis said lower long-term interest rates can explain only a small part of the drop in the ratio. “To justify current price levels, you need rapid growth in rents.” But it’s hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it’s possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out.

Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. “When a downturn begins, it will last for a while.”

By Greg Ip
From The Wall Street Journal Online