Tuesday, November 20, 2012

WaPo: Price-to-rent ratio for Certain Cities

by Bill McBride on 11/20/2012 05:46:00 PM

Neil Irwin at the WaPo looks at the price-to-rent ratio for several cities using Case-Shiller prices and Owner's equivalent rent (OER) from the BLS. This is the same approach I use with the national data very month.

From Neil Irwin at the WaPo: Why Atlanta, New York, and Chicago are poised to drive a housing recovery

A good way to look at which housing markets are potentially overvalued and which are undervalued—and where the market seems to be begging for new home construction and where there is still a surplus of unneeded houses—is to look at the relationship between rents and home prices. Over long periods of time, the price to rent a given house should rise at about the same rate as the price to buy one.

But over shorter periods of time, the two can diverge. And when they do, it is usually a sign that something curious is up in that market. For example, from 2000 to 2005, prices in the Miami metro area rose by 136 percentage points more than did rents, a sure sign that it was one of the nation’s most bubbly housing markets.
The best news out of this analysis, though, may be this: Most of the largest U.S. cities have housing markets that have been in pretty good balance over the last year, with prices rising at about the same rate as rents. That’s true of the Washington metro area ( where prices are up 4.3 percent, rents up 2.4 percent), and also of San Francisco, Los Angeles, Boston, Dallas, Seattle, and Cleveland.

And that may be the best sign for the housing market of all. After all these years of bubbles and busts, ups and downs, there finally is a measure of stability.
Irwin only looked at Case-Shiller cities with monthly OER data. However the BLS has semi-annual OER data for several more Case-Shiller cities.

Price Rent Ratio Click on graph for larger image.

This graph shows the price-to-rent ratio of Case-Shiller and OER for Denver, Portland and San Diego (cities Irwin didn't include).

The BLS only provides first and second half OER data for these cities, so I averaged six months of the Case-Shiller indexes to calculate the price-to-rent ratio. I set the ratio to 1.0 for the period 1997 through 2000.

It appears San Diego is back to normal, and prices in Denver and Portland might be a little high by this measure.