Historic House Price vs. Rent Ratio

[ltokuda]

[img_assist|nid=7135|title=Historic National House Price vs. Rent Ratio|desc=|link=node|align=left|width=466|height=360]

Here’s a chart of the historic national house price / rent ratio. I used the Case-Shiller data for the house price and the BLS CPI data for the rents. I thought it was interesting how much that ratio has changed over the last 95 years.

Before the 1940’s, the price/rent ratio was about 0.2. From the 40’s through the 60’s, that ratio was about 0.4. And from the 70’s through the 90’s, that ratio was about 0.5. Right now, the ratio is at about 0.8!

I think there are probably good reasons why the price/rent ratio has gone up over the years. I’m guessing the formation of Fannie Mae (in 1938) might have helped to boost the ratio from 0.2 to 0.4. Then maybe the formation for Freddie Mac (in 1970) helped to boost the ratio from 0.4 to 0.5?

I’m just guessing here. I’m hoping others will chime in and provide some sound reasoning/analysis of why the price/rent ratio has changed so drastically and done so in steps.

The other question I have is “Are we at a new step?” I’m wondering if financial innovation has taken us to a new level, where a higher price/rent ratios will be supported.

Right now, the MBS market is basically in a coma so maybe we’ll get back to that ratio of 0.5. In fact, it looks like some parts of the inland empire are getting close to “normal” already. But I wonder if there was real, sound financial innovation (regarding MBS’s) that occored over the last 10 years. If so, could that market come alive again (hopefully in a more regulated form) and take the price/rent ratio to a new, sustainable level? Any thoughts on this?

[nostradamus]

I can’t see the years on your chart.

[nostradamus]

I can’t see the years on your chart.

[nostradamus]

I can’t see the years on your chart.

[nostradamus]

I can’t see the years on your chart.

[nostradamus]

I can’t see the years on your chart.

[jpinpb]

Ok. I need a little help w/this chart. According to this chart, real estate prices have continually gone up since 1940. Declines seem modest compared to the increase. Not to question anyone here. Trying to understand. Maybe the decrease won’t be so bad even this round.

[jpinpb]

Ok. I need a little help w/this chart. According to this chart, real estate prices have continually gone up since 1940. Declines seem modest compared to the increase. Not to question anyone here. Trying to understand. Maybe the decrease won’t be so bad even this round.

[jpinpb]

Ok. I need a little help w/this chart. According to this chart, real estate prices have continually gone up since 1940. Declines seem modest compared to the increase. Not to question anyone here. Trying to understand. Maybe the decrease won’t be so bad even this round.

[jpinpb]

Ok. I need a little help w/this chart. According to this chart, real estate prices have continually gone up since 1940. Declines seem modest compared to the increase. Not to question anyone here. Trying to understand. Maybe the decrease won’t be so bad even this round.

[jpinpb]

Ok. I need a little help w/this chart. According to this chart, real estate prices have continually gone up since 1940. Declines seem modest compared to the increase. Not to question anyone here. Trying to understand. Maybe the decrease won’t be so bad even this round.

[EconProf]

BobS
I suggest that for the first half of the 20th century, investors did not build inflationary expectations into their investment decisions. Deflation was a HUGE problem for most of the period up to WWII. The assumption throughout the war was that we would return to a depression after the war’s end. Accordingly, anyone owning rental real estate had to get cash flow to offset the (probably) declining asset price.
By the mid-1960s and thereafter inflation took hold with a vengance. Investors in real estate now were parking their money in a growing asset, so rents could become a smaller % of the long run expected return.
Also, as has been mentioned, financing innovations and increased leverage over the decades played a big part. In the 1920s, home loans were rare and short in duration.

[EconProf]

BobS
I suggest that for the first half of the 20th century, investors did not build inflationary expectations into their investment decisions. Deflation was a HUGE problem for most of the period up to WWII. The assumption throughout the war was that we would return to a depression after the war’s end. Accordingly, anyone owning rental real estate had to get cash flow to offset the (probably) declining asset price.
By the mid-1960s and thereafter inflation took hold with a vengance. Investors in real estate now were parking their money in a growing asset, so rents could become a smaller % of the long run expected return.
Also, as has been mentioned, financing innovations and increased leverage over the decades played a big part. In the 1920s, home loans were rare and short in duration.

[EconProf]

BobS
I suggest that for the first half of the 20th century, investors did not build inflationary expectations into their investment decisions. Deflation was a HUGE problem for most of the period up to WWII. The assumption throughout the war was that we would return to a depression after the war’s end. Accordingly, anyone owning rental real estate had to get cash flow to offset the (probably) declining asset price.
By the mid-1960s and thereafter inflation took hold with a vengance. Investors in real estate now were parking their money in a growing asset, so rents could become a smaller % of the long run expected return.
Also, as has been mentioned, financing innovations and increased leverage over the decades played a big part. In the 1920s, home loans were rare and short in duration.

[EconProf]

BobS
I suggest that for the first half of the 20th century, investors did not build inflationary expectations into their investment decisions. Deflation was a HUGE problem for most of the period up to WWII. The assumption throughout the war was that we would return to a depression after the war’s end. Accordingly, anyone owning rental real estate had to get cash flow to offset the (probably) declining asset price.
By the mid-1960s and thereafter inflation took hold with a vengance. Investors in real estate now were parking their money in a growing asset, so rents could become a smaller % of the long run expected return.
Also, as has been mentioned, financing innovations and increased leverage over the decades played a big part. In the 1920s, home loans were rare and short in duration.

[Author]

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