Historic House Price vs. Rent Ratio

[ltokuda]

I think you might be onto something, but I am having trouble understanding this…

ratio = price / rent

What numbers specifically do you use for the graph? Median prices? Annualized median rents? How come your ratio is below 1?

Sandi, for the price index numbers, I got the data from http://www.irrationalexuberance.com.  For the rent numbers, I got the data from http://www.bls.gov/data/home.htm.   To get the ratio, I just divided those numbers for each year.

The price numbers represent the median house price but do not tell you the actual $ amount.  So a single price number by itself doesn't really tell us anything about how much a house costs.  But when you graph a series of these numbers over time, it shows you how prices have changed over the years.

The same is true with the rent numbers.  The rent numbers represent the median rent price but do not tell you the actual $ amount.  I only use this data to see how rent prices have changed over time.

The ratio (price/rent) is also meaningless if you just look at a single value.   What's important here is to look at how that ratio has changed over time.

[34f3f3f]

I’m being really thick here, but I’m not clear on what figure is dividing into what, and therefore what the trend is supposed to be saying. My guess is that it is saying home values have increased significantly over the years compared to rentals, or to look at it another way, ROI’s have gradually declined. But here’s me being really thick again, but putting aside asset appreciation doesn’t that mean RE as an income investment would have become rather unattractive?

[34f3f3f]

I’m being really thick here, but I’m not clear on what figure is dividing into what, and therefore what the trend is supposed to be saying. My guess is that it is saying home values have increased significantly over the years compared to rentals, or to look at it another way, ROI’s have gradually declined. But here’s me being really thick again, but putting aside asset appreciation doesn’t that mean RE as an income investment would have become rather unattractive?

[34f3f3f]

I’m being really thick here, but I’m not clear on what figure is dividing into what, and therefore what the trend is supposed to be saying. My guess is that it is saying home values have increased significantly over the years compared to rentals, or to look at it another way, ROI’s have gradually declined. But here’s me being really thick again, but putting aside asset appreciation doesn’t that mean RE as an income investment would have become rather unattractive?

[34f3f3f]

I’m being really thick here, but I’m not clear on what figure is dividing into what, and therefore what the trend is supposed to be saying. My guess is that it is saying home values have increased significantly over the years compared to rentals, or to look at it another way, ROI’s have gradually declined. But here’s me being really thick again, but putting aside asset appreciation doesn’t that mean RE as an income investment would have become rather unattractive?

[34f3f3f]

I’m being really thick here, but I’m not clear on what figure is dividing into what, and therefore what the trend is supposed to be saying. My guess is that it is saying home values have increased significantly over the years compared to rentals, or to look at it another way, ROI’s have gradually declined. But here’s me being really thick again, but putting aside asset appreciation doesn’t that mean RE as an income investment would have become rather unattractive?

[EconProf]

BobS
Querty007: You are right–investing in houses or condos to rent out is a perfectly horrible investment right now. I speak as one who has made money at it since the 1980’s and am now largely out. It made money only because of appreciation…cash flow was never significant. Now with the rent/price ratio so out of kilter, cash flow is hugely negative. Add to that the declining value of the property and you have a recipe for disaster. At some bottom point, years away, it will make sense again. I’ll be a bottom-fisher then, as will many others on this site.

[EconProf]

BobS
Querty007: You are right–investing in houses or condos to rent out is a perfectly horrible investment right now. I speak as one who has made money at it since the 1980’s and am now largely out. It made money only because of appreciation…cash flow was never significant. Now with the rent/price ratio so out of kilter, cash flow is hugely negative. Add to that the declining value of the property and you have a recipe for disaster. At some bottom point, years away, it will make sense again. I’ll be a bottom-fisher then, as will many others on this site.

[EconProf]

BobS
Querty007: You are right–investing in houses or condos to rent out is a perfectly horrible investment right now. I speak as one who has made money at it since the 1980’s and am now largely out. It made money only because of appreciation…cash flow was never significant. Now with the rent/price ratio so out of kilter, cash flow is hugely negative. Add to that the declining value of the property and you have a recipe for disaster. At some bottom point, years away, it will make sense again. I’ll be a bottom-fisher then, as will many others on this site.

[EconProf]

BobS
Querty007: You are right–investing in houses or condos to rent out is a perfectly horrible investment right now. I speak as one who has made money at it since the 1980’s and am now largely out. It made money only because of appreciation…cash flow was never significant. Now with the rent/price ratio so out of kilter, cash flow is hugely negative. Add to that the declining value of the property and you have a recipe for disaster. At some bottom point, years away, it will make sense again. I’ll be a bottom-fisher then, as will many others on this site.

[EconProf]

BobS
Querty007: You are right–investing in houses or condos to rent out is a perfectly horrible investment right now. I speak as one who has made money at it since the 1980’s and am now largely out. It made money only because of appreciation…cash flow was never significant. Now with the rent/price ratio so out of kilter, cash flow is hugely negative. Add to that the declining value of the property and you have a recipe for disaster. At some bottom point, years away, it will make sense again. I’ll be a bottom-fisher then, as will many others on this site.

[svelte]

The graph looks practically identical to the house price index graph that was used, specifically the one from:

http://www.irrationalexuberance.com

click on link in the second bullet, then click on the Fig 2.1 tab.

The only difference is that some of the minor ups and downs have been smoothed out – otherwise you could practically lay the two graphs over each other.

I also went to:

http://www.bls.gov/data/home.htm

to find where the rent data came from, but there is so much stuff on that page I couldn’t find it.

In any case, I think all the graph in this thread is showing is that housing prices have been the driver in the graph up-and-downs (since it matches the house index graph), while rents have been fairly consistent in 1880 dollars since 1880. Otherwise, the graph shape would have changed shape, wouldn’t it? I dunno. I’m tired of thinking about it.

[svelte]

The graph looks practically identical to the house price index graph that was used, specifically the one from:

http://www.irrationalexuberance.com

click on link in the second bullet, then click on the Fig 2.1 tab.

The only difference is that some of the minor ups and downs have been smoothed out – otherwise you could practically lay the two graphs over each other.

I also went to:

http://www.bls.gov/data/home.htm

to find where the rent data came from, but there is so much stuff on that page I couldn’t find it.

In any case, I think all the graph in this thread is showing is that housing prices have been the driver in the graph up-and-downs (since it matches the house index graph), while rents have been fairly consistent in 1880 dollars since 1880. Otherwise, the graph shape would have changed shape, wouldn’t it? I dunno. I’m tired of thinking about it.

[svelte]

The graph looks practically identical to the house price index graph that was used, specifically the one from:

http://www.irrationalexuberance.com

click on link in the second bullet, then click on the Fig 2.1 tab.

The only difference is that some of the minor ups and downs have been smoothed out – otherwise you could practically lay the two graphs over each other.

I also went to:

http://www.bls.gov/data/home.htm

to find where the rent data came from, but there is so much stuff on that page I couldn’t find it.

In any case, I think all the graph in this thread is showing is that housing prices have been the driver in the graph up-and-downs (since it matches the house index graph), while rents have been fairly consistent in 1880 dollars since 1880. Otherwise, the graph shape would have changed shape, wouldn’t it? I dunno. I’m tired of thinking about it.

[svelte]

The graph looks practically identical to the house price index graph that was used, specifically the one from:

http://www.irrationalexuberance.com

click on link in the second bullet, then click on the Fig 2.1 tab.

The only difference is that some of the minor ups and downs have been smoothed out – otherwise you could practically lay the two graphs over each other.

I also went to:

http://www.bls.gov/data/home.htm

to find where the rent data came from, but there is so much stuff on that page I couldn’t find it.

In any case, I think all the graph in this thread is showing is that housing prices have been the driver in the graph up-and-downs (since it matches the house index graph), while rents have been fairly consistent in 1880 dollars since 1880. Otherwise, the graph shape would have changed shape, wouldn’t it? I dunno. I’m tired of thinking about it.

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