[OPE] House price-to-rental ratio

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Fri Feb 22 2008 - 11:39:54 EST


You may be correct about the historic trend, but part of the meaning of the bubble is that in recent years prices and rents diverged.

http://www.newyorkfed.org/research/epr/04v10n3/0412mcca.pdf Chart 4 on p. 5 provides a comparison of average house prices and average implicit rents. 

A few more index graphs:

Another comment:

"Between 1990 and 1999, [US] rents generally grew at a slightly higher rate than home prices. Average annual growth in rents ranged from 1.6 percent in St. Louis to 7.4 percent in Houston. This pattern resulted in fairly stable rent-to-price ratios during the 1990s, when home prices and rents moved, more or less, in tandem. Beginning in the late 1990s and early 2000, however, many regions started experiencing double-digit inflation rates in home prices. (...) While home prices continued to grow at double-digit rates in many parts of the country, rents for comparable properties lagged behind (see Figure 2). For example, since 2000, home prices in Los Angeles have increased by an average of 16.9 percent per year while rents have grown by 7.6 percent. In Miami, home prices grew by 17.7 percent--more than five times the rate at which rents increased. (...) The growing imbalance between home prices and rents has meant that homes in many markets are now overvalued, because the option of renting, rather than buying, is financially more attractive to potential buyers. A handful of markets, however, have bucked this trend." http://goliath.ecnext.com/coms2/gi_0199-6992650/Are-homes-overvalued-A-comparison.html

The OFHEO House Price Index is here: http://www.ofheo.gov/media/pdf/3q07hpi.pdf Its various reports provide additional data. As you might expect, house price rises are currently highest in Washington State and lowest in Michigan.

To my knowledge the US lacks a proper standard index of rental accommodation, although many economists have recommended such a thing. I suppose you could try to compute one e.g. from the CES, or from NIPA data on implicit rents. However, the BLS does provide a standard CPI for rent and rental equivalence. http://www.bls.gov/cpi/cpifact6.htm


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