Everyone understands that the last few years of boom and bust in housing were anything but normal. But none of the people thinking about buying or selling, or just trying not to worry about their home’s value, know what a normal housing market would look like. Two common measures of how far out of line home prices may be are based on comparing home prices to rents and to income. Looking at these data (see chart) since 1987 using the S&P/Case-Shiller 10 city composite index, we are not far from normal now. Prices are a high compared to rents and just about on target compared to incomes. The market seems to be saying that while the price of a house is probably in line with incomes, it is still a bit high compared to current rent rates so there may be is a weak case to be made for waiting to buy for a while.
The data in the chart use the S&P/Case-Shiller 10 City Composite for price. The rent rate is based on the CPI index for primary residence rental cost and the income number is from the Federal Government’s data on disposable personal income per capita. The ratios were scaled to be 100 in January 1987. What’s normal? Looking at the chart and at other S&P/Case-Shiller data, normal was defined as 1987-2000, before the housing boom really got going. In that period, the average price:rent ratio is 105.5 and the average price:income ratio was 92.1, Current data (February 2011) is 118.3 for price:rent and 90.6 for price:income.
Both these measures often find their way into realtors’ pitches about neighborhoods or when to time a purchase. The New York Times earlier this week carried a survey of price:rent ratios in several cities showing that in some places things were reasonable while in a few others prices still seemed high compared to rents.