Monday, May 30, 2005

Price to rent ratios II

This San Francisco Federal Reserve report shows data going back to 1982. The current period is clearly anomalous (it recalls P/E ratios during the tech bubble 1995-2000). I expect to see a repeat of the bump seen earlier in the late 1980s to early 1990s; note the inevitable reversion to the mean. It won't be pretty given new phenomena like zero-interest and sub-prime mortgages, and home equity loans. (Compare to Japan's 20 year housing bubble, discussed in an earlier post. Ours may take another decade to unwind as well.)

Below is some data recently published in the Times. Note the nationwide uniformity of price-rent ratios in 2000, as opposed to today. The bay area leads the nation with a ratio that has almost tripled in the last 5 years.

It is possible that replacing home price by monthly mortgage payment in the numerator would account for most of the 2000-2005 increase in national average price-rent (from 11.6 to 17.1), but this doesn't come close to explaining the frothier regions on the coasts.

1 comment:

Anonymous said...

A local realty agency (southern cal) recently sent me some unsolicited "research" on the real estate market, acknowledging that prices are high nationally but finding that there are some local markets still poised for dramatic gains. What were they? You guessed it: LA and San Diego! Who'd have thunk it?

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