Morris Davis, economist in the department of real estate and urban-land economics at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed, is one of the authors of a study that finds homes overvalued compared to rents. He addressed questions about the study in this article.
Let me start by providing some other background information on why the rent-price ratio for housing â?? which is like the dividend yield for housing as an asset â?? is a useful metric. (Subscription required.)
In a world without uncertainty and with constant growth, the dividend yield of an asset has the simple expression of r-g, where r is the discount rate on future dividends and g is the growth rate of dividends. Thus, if the dividend yield falls, either the discount rate r has fallen or the expected growth rate of dividends g has increased or both.