Key Highlights

  • National house price-to-rent ratio used as barometer of housing valuation
  • Result? Average house selling for more than “fair value”

House Price-to-Rent Ratio Similar to Price-to-Dividend Ratio for Stock Market

One of the key measures economists use to determine housing valuation is the national house price-to-rent ratio.  This housing market barometer is similar to Wall Street’s valuation tool, the price-to-dividend ratio.

According to economists, the current price-to-rent ratio is at its highest level since 1975.  This measure is now sitting at 101, 1% higher than the previous peak hit in January 2006.

Rental Housing First Step in Analyzing “Fair Value” in Housing

It is easier to determine the “fundamental value” of rental housing than owner-occupied houses.  Why? Because, typically, a person’s housing investor  “discount rates” are fairly consistent over time when regarding housing investments; and economists typically expect house-price-to-rent ratios to remain fairly constant.

Any continuing upward movement in the price-to-rent ratio would indicate increasing overvaluation.  Conversely, any continuing downward movement in this ratio would indicate under evaluation.

Problem with Valuing Owner-Occupied Homes

Owners obviously don’t pay any rent…all levels of mortgage payments but no rent.

To get around this, the Bureau of Labor Statistics (BLS) estimates an “imputed rent” for owner-occupied housing on a monthly basis in both metro areas as well as the country’s entire housing stock.

Obviously, such an “imputed” measurement is not exact.

Historical Comparison

HOWEVER, during the 46 years that both the Federal Housing and Finance Agency and the Freddie Mac House Price Index have been “imputing,” the average value of the ratio has stood at about 78.

In March 2021, the house price-to-rent ratio stood at about 101, +30% higher than the average value of the ration at 78, and obviously higher than the estimate of fair value of housing.

Bottom Line: Are We Facing a Housing Bubble?

The risks in the housing industry today are different than the risks faced in 2006.  Our country’s financial system and the economy appear to be much less serious today than in 2006, according to industry experts.

Lending practices today are much different than the almost lack of lending practices that existed in 2006.

And importantly, homeowners today have greater home equity and less mortgage debt than they had in 2006.

Even still, today’s elevated home-price-to-rent ratio needs to be paid attention to.

 

Thanks to St. Louis Fed and HousingWire.

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