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Friday, March 19, 2010

Housing: Price-to-Rent Ratio

by Calculated Risk on 3/19/2010 10:15:00 AM

Here is an update on the price-to-rent ratio using the First Amercican CoreLogic price index released yesterday for house prices through January.

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

The following graph uses the First American data ...

Price-to-Rent RatioClick on graph for larger image in new window.

This graph shows the price to rent ratio (January 2000 = 1.0).

This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Also, OER declined slightly again in February. The price index has declined 6 of the last 8 months, although most of the declines have been very small. With rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.