Tuesday, February 23, 2010

Housing: Price-to-Rent Ratio

by Calculated Risk on 2/23/2010 08:27:00 PM

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.

Here is a similar graph through December 2009 using the two Case-Shiller Home Price Composite Indices:

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 again in January, and with rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.