Tuesday, November 29, 2016

Real Prices and Price-to-Rent Ratio in September

by Bill McBride on 11/29/2016 11:59:00 AM

Here is the earlier post on Case-Shiller: Case-Shiller: National House Price Index increased 5.5% year-over-year in September

It has been ten years since the bubble peak. In the Case-Shiller release this morning, the National Index, not seasonally adjusted (NSA) was reported as being at a new nominal high. The seasonally adjusted (SA) index was reported as being only 0.8% below the bubble peak. However, in real terms, the National index (SA) is still about 15.7% below the bubble peak.

The year-over-year increase in prices is mostly moving sideways now around 5%. In September, the index was up 5.5% YoY.

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $276,000 today adjusted for inflation (38%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through September) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to February 2006 levels, and the Case-Shiller Composite 20 Index (SA) is back to June 2005 levels, and the CoreLogic index (NSA) is back to August 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

CPI less Shelter is unchanged over the last two, so real prices increased the same as nominal prices.

In real terms, the National index is back to March 2004 levels, the Composite 20 index is back to November 2003, and the CoreLogic index back to February 2004.

In real terms, house prices are back to late 2003 / early 2004 levels.

Price-to-Rent

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.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to August 2003 levels, the Composite 20 index is back to April 2003 levels, and the CoreLogic index is back to July 2003.

In real terms, and as a price-to-rent ratio, prices are back to late 2003  - and the price-to-rent ratio maybe moving a little more sideways now.