To conclude, we expect a positive correlation between the abnormal rent-to-price ratio as of the beginning of a decade and the rate of observed price appreciation during the decade.
This return to normal would manifest itself as a reduced expected capital appreciation.
To summarize, our second step, which we use to make our predictions about long-run housing appreciation rates in a metro area, contains three factors.
We predict that higher values of this variable will be associated with higher subsequent appreciation.
Because slow adjustments to the housing stock will cause prices to return to normal, positive income shocks of the previous decade will be associated with lower rates of price appreciation during the forecast decade.
Using four sets of census data we are able to analyze three sets of decadal price appreciation data.
If quality-adjusted rent-to-price ratios are high in a particular metro area, owners are willing to accept lower expected capital appreciation in return for avoiding relatively high rental payments.
When rent-to-price ratios are higher than our first-step model predicts, subsequent appreciation rates are above average.
Thus, a positive ARPR observed today does not predict an instantaneous jump in house values, but it does indicate higher subsequent appreciation rates.
Finally, income growth during the previous decade is, as predicted, negatively related to subsequent housing price appreciation rates.
This yielded forecasts of housing appreciation rates for the decade of the '90s.
However, it is the ability of our model to identify and predict those areas with unusual appreciation rates that we feel provides the greatest predictive value.
Home price appreciation rates are important to homeowners, builders, Realtors, and especially lenders.