The latest S&P/Case-Shiller Home Prices, combined with the home-owners rental equivalence index from the Census Bureau’s CPI report, shows that renting vs. buying is roughly in balance. The first chart compares the rent:buy ratio with its average since 1987. In the 1990s renting was relatively expensive while during the housing boom-bust buying a home was much more costly. Since home prices collapsed and have remained in a narrow range in the last year or two, the rent:buy ratio came back to its average. Another long-term measure of home value is the ratio of home prices to per capita disposable income, as seen in the second chart. When home prices surged in the early 2000s, the ratio of home prices to income climbed sharply Since the bust these are also back down to the long term average. Unlike the rent:buy ratio, the most recent data shows deterioration of this measure below the average since 1987. This may reflect concerns that median incomes are flat to lower in the last decade.
A related measure is the real or inflation-adjusted price of homes shown on the third chart. During period of rapid inflation many people look to real estate holdings for inflation protection. Fortunately we have not suffered rapid inflation since the 1970s and early 1980s so inflation fears are not spurring home buying. The overall price pattern is the same for inflation-adjusted and nominal home prices.
All these measures do carry at least one important reminder for home owners, home buyers and renters: the prices seen in 2006 and the middle of the last decade were not normal. Someone buying a home today who expects prices to jump 20%, 30% or more overnight to back to levels of 2006 is likely to be disappointed. Someone who bought a house at the peak seen a few years ago is already disappointed.