Rent-Buy and Price-Income Ratios Look Positive

Two popular ways to measure if house prices are high or low is to compare the cost of buying a house to renting one and to look at the ratio of house prices to personal income.  The Rent-Buy ratio suggests that house prices are close to their average values since 1987 and past the boom and bust. The measure compares the 10-city composite index in the S&P/Case-Shiller Home Price Indices to the Consumer Price Index for rental of a primary residence. As shown there, the ratio has come back close to the long run average and shows not extreme favortism to either renting or buying.

Comparing Owning to Renting a Home

Source: S&P/Case-Shiller Indices and US CPI

The second measure compares home prices to disposable personal income per capita — essentially average after tax income per person. That measure with an index value of 90 is below the average value of 102 since 1987.  On this measure, houses are almost cheap.

 

House Prices to Income Ratio

Comparing House Prices to Incomes

 

One quick way to forecast the overall economy is to look at the stock market.  The S&P 500 is one of the leading indicators published by the Conference Board and most economic forecasters agree that the stock market often leads the economy in both expansions and recessions.  From an article in the Wall Street Journal, hedge funds and other investors are looking for a housing rebound in 2012.  In fact, stocks of homebuilders out-performed the overall market in the fourth quarter through December 28th.  Of course, no forecast is flawless and the stock market can certainly get things wrong (witness the last few years).

The posts on this blog are opinions, not advice.
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2 Comments

  1. Michael E says:

    Hi David – is this data available on a regional level? I’m interested in seeing how the graphs vary across the nation.

    • David Blitzer says:

      The rent-to-buy calculation uses a series from the Consumer Price Index on rental expenses of a primary residence. This data is available on a national level, but not for Metropoltan Statistical Areas so we can’t calculate the ratio for each city. I don’t know of any local indices for residential rent that could be compared to the S&P/Case-Shiller Home Price Indices.

  2. [...] Something to consider if researching whether or not to buy a home now : Rent-Buy and Price-Income Ratios Look Positive [...]

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