Monday, February 14, 2011

Leonhardt: Seattle’s Foreseeable Housing Bust

by Bill McBride on 2/14/2011 09:03:00 AM

From David Leonhardt at the NY Times Economix: Seattle’s Foreseeable Housing Bust. This is a follow-up to David Streitfeld article: Housing Crash Is Hitting Cities Thought to Be Stable

Leonhardt writes:

When we last listed the price-to-rent ratios in major metropolitan areas, Seattle’s was near the top of the list. Only in the Bay Area of Northern California and in Honolulu were house prices higher, relative to rents.

A sky-high price-to-rent ratio is perhaps the single best sign that an area is in a housing bubble. Real-estate agents, homeowners and even home buyers can tell a lot of stories to justify the bubble — stories about central cities or good school districts being immune to bubbles — but eventually people will realize that renting is a much better deal and more will do so.

There is no such thing as a market price that cannot fall.
I agree completely with that last sentence - no place is immune.

Price-to-rent is a great indicator, but some areas have high price-to-rent ratios because of the mix of housing units (rentals units are not perfect substitutes for buying). I prefer tracking price-to-rent over time for a particular city (as opposed to comparing cities), but a high price-to-rent ratio is definitely a warning flag.