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Home Prices: This Ratio Signals What is Likely Next

Expect a deflation in U.S. home prices just ahead.

Before getting into an explanation as to why, let's start off with a Wall Street Journal headline from just a month ago (July 22):

U.S. Median Home Price Hit New High in June

More recent news stories have discussed a slowdown in new home sales, yet prices remain elevated according to some local headlines (The Orange County Register, August 18):

Housing market hits record-high price despite signs of leveling off

Southern California's median home price hit $681,750 in July, rising on average almost $2,000 every week for the past year.

Here's another example (Austin American-Statesman, August 19):

While prices continue to rise, Austin's home sales have slowed.

However, according to a key ratio, the rise in home prices is likely headed for a reversal.

This chart and commentary from the August Elliott Wave Financial Forecast provide insight:

PeakHomePrices

This chart of U.S. home prices to rents, courtesy of The Campbell Real Estate Timing Letter, shows another important series of correlations that date back 45 years. Home prices invariably peak when the ratio is high and bottom when it is low. At this point, the ratio has never been higher. The only other reading of more than 100 came as house prices peaked in 2006. [Emphasis added]