Tuesday, August 25, 2015

Housing Getting Kinda Bubbly Again

Figured it was time to take a look at the "Price to Rents Ratio" of the US housing market.  For those unfamiliar with this ratio it is basically a "PE" ratio, but for property.  It takes the price of a house and divides it by rent (either monthly, annual, etc., as long as you're consistent, you'll get the same shape graph).

Though nowhere near the peak of the bubble, it seems chronically low interest rates has driven money into the market even though rents may not warrant it.  Back in 1960 the ratio was 17, now it's 23.  Roughly a 25% overvaluation.

Nothing to panic about yet, but more proof it is federal reserve funny money is indeed causing inflation.  We're just happy with this because "housing going up is good" even though people have to buy into this market.

Enjoy the decline!



Anonymous said...

My wife and I were beginning to look at houses, but I think it may be smarter to continue to rent at this point. I'm not getting suckered into a mortgage that will be quickly driven underwater (even on a 15-year note) if everything comes crashing down. Plus, in our state (Illinois), local property taxes are ridiculous due to state funding cuts necessitated by a decade of state fiscal mismanagement by George Ryan and Rod Blagojevich.

lordofthejelly said...

Question: why is 1960 the gold standard? Is there a specific reason, or is that just as far back as the records go?

Doubting Richard said...

When I bought a house to rent in 1996 in the UK I was told to aim for 1% per month, or about 8 on this scale. I actually paid £43,000 and achieved £500 rent, for a ratio of just over 7. Now the flat I just sold for £290,000 has been rented out for £1400, about 17 on your scale. I think this is a bubble in the UK, we must just have higher rental costs than the US.

Aaron said...


California is worse off. San Francisco, for example.