Equity investors like to check out a company's price/earnings ratio before they invest in its stock. Likewise, real estate investors should do the same before buying a house. The equivalent of price/earnings ratio for real estate is the price/rent ratio, or inversely, the rent/price yield.
What is a reasonable rent/price yield for US residential real estate? According to Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert and Robert Martin of the Fed, the long-term average is 5% (i.e. the annual rent of a house should be about 5% of its market value). As the Economist magazine has reported, at the height of the US housing boom, this figure dropped to as low as 3.5%.
Currently, this ratio is at about 4.3%, which implies that average US housing price has to drop another 14% in order to return to its historical fair value.
Can quantitative traders profit from this prediction? Well, we can always short the S&P/Case-Shiller Home Price Indices futures at the Chicago Mercantile Exchange.