How Cheap is Housing?

Two questions asked over and over at each monthly release of the S&P/Case-Shiller Home Price indices are “Is housing cheap?” and “Is this the time to buy a house?”  We look at three measures of how cheap, or dear, houses are: renting vs. buying, home prices and incomes and inflation adjusted prices.  Whether this is the right time to buy depends on the buyer’s circumstances and the answer won’t be the same for everyone.

The first chart show the ratio of rents to home prices since 1987 and shows that things are almost in balance today compared to the last 25 years.   When the ratio is above the mid-line at 100, buying is cheaper than renting, and vice-versa. In the decade of the 2000s, as home prices surged and then collapsed, renting was preferred.   With the recent decline,  buying appears more attractive.


Rent:Buy Ratio

Buying Preferred When Ratio is High

Another way to measure  housing costs is to compare home prices to income.  Income is disposable personal income (DPI), what’s left after taxes are paid. We look at the ratio of home prices measured by the S&P/Case-Shiller 10-City Composite to DPI, as shown in the chart.   Since there is no standard or just-right number, the chart shows the average since 1987. Over the last 25 years there are periods when houses were cheap and other times when they were expensive. As shown by the ratio, compared to DPI  home prices today are as low and any time since the late 1980s.  What’s happened is that home prices have been falling consistently since 2006.  Incomes did fall during the recent recession, but have since recovered.   This indicator shows that houses, when gauged by income, are getting cheaper.  However,  since income is rising and house prices aren’t, houses could get even cheaper.

 Comparing Home Prices and Incomes

The third look at home prices is simply to remove inflation by dividing the S&P/Case-Shiller 10-City Composite by the Consumer Price Index.  As shown on the last chart, this flattens out the index somewhat but leaves the boom-bust pattern as steep as ever.  When the gains due to inflation are removed we see prices back to levels last seen in 2001. tenyears ago.

Adjusted by the CPI

The posts on this blog are opinions, not advice.
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One Comment

  1. Ed Hamilton says:

    I also do “simply to remove inflation by dividing the S&P/Case-Shiller 10-City Composite by the Consumer Price Index.”, except using the S&P/Case-Shiller National index.

    The New York Times did so in 2006:
    and included “Two gains in recent decades were followed by returns to levels consistent since the late 1950’s.”.

    On my charts, updated through 2011 Q4,
    the NYT ‘returns to levels’ is about 54, which is a 7% drop from 2011 Q4.

    The last chart here
    suggests that the 10-City and 20-City composites are much further above “… where we were in 1997.”.

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