Where You Sit

depends on where you stand, I guess. In this morning’s article in the New York Times prices of housing, the assets from which the various financial instruments that have caused so much trouble in the banking sector derive their value, have a long way to fall:

In New York and other cities that rely heavily on the financial sector, economists expect that job losses will increase and that pay heavily tied to year-end bonuses will decline significantly.

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country. Economy.com’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.

Here in Chicago the picture is somewhat different. The mortgage to rent ratio, the ratio between the monthly mortgage payment on a median house and the median monthly rental on a three bedroom apartment, is 1.27. That and the price to rent ratio are both about 30% higher than they were eight years ago but that’s nothing like the titanic differences in California and Florida.

This underscores a point I’ve been making here for some time: the basic problem is very regionalized and a prudent solution would be, too. The aggravating factor is interstate banking. Were it not for interstate banking the problems would be localized.

In the modern day we need interstate banking but that means we need to have institutions that are capable of handling interstate banking, too. It’s quite obvious that we don’t.

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