Housing Price to Rent Ratio
While we await the latest Existing-home sales for April, to be released at 10:00am, let's have a qwuick look at a related chart.
All those Housing Bottom callers should consider the Housing Price to Rent ratio. It argues very loudly against a bottom anytime soon:
chart courtesy of Janet L. Yellen, President, Federal Reserve Bank of San Francisco
>
See also: No spring bounce for housing, Toll CEO says
Source:
Speech to the Certified Financial Analysts Institute, Annual
Conference
Vancouver, British Columbia
Janet L. Yellen, President and
CEO, Federal Reserve Bank San Francisco
May 13, 2008,
10:00 AM Pacific time, 1:00 PM Eastern
http://www.frbsf.org/news/speeches/2008/0513.html
Credit, Housing, Commodities and the Economy
Charts
http://www.frbsf.org/news/speeches/2008/charts.pdf
Friday, May 23, 2008 | 09:15 AM | Permalink
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Comments
I do tend to "put stock in this", but it's worth remembering rental and owned housing aren't perfect substitutes.
Ironically, one of the elements of imperfect substitution is that owned housing has greater security of tenure.
Record foreclosures may have dented that particular advantage recently.
Posted by: Estragon | May 21, 2008 2:39:08 PM
When I look at this chart, I wonder to what extent did access easy credit help to keep rent artificially low over the last 6-7 years.
It would be interesting to compare change in rent over time to see if a regression to the historical norm is likely.
At least in my area, rents seem to be on the rise. Maybe that will soften the blow of falling property value. Although there is still a glut of inventory on the high end.
Posted by: Vince | May 23, 2008 9:44:55 AM
If he's still watching here, I want to ask cinefoz respectfully about his beliefs of 3-4 months ago that this spring would be the turnaround for housing. My contrary belief at the time was based on the abnormal price-rent ratio as picture above. I'm curious about whether he considered this, but believed he had other overriding factors to counterbalance, or if it wasn't part of his analysis.
I realize that the picture's more complicated than one measure, but this seems to be one of the more fundamental measures of the size of the situation.
Posted by: pmorrisonfl | May 23, 2008 9:45:17 AM
I assume that rent-controlled developments pulled out of the equation?
Looks like rent needs to go up.
Posted by: mike e. | May 23, 2008 9:56:14 AM
OT:
Kimberly-Clark, marker of Kleenex tissues, Huggies diapers and a host of other consumer products, said Friday it would raise prices by 6 percent to 8 percent in the third quarter to offset higher raw material and energy costs.
There's no inflation here...move along....
Posted by: Mr. Obvious | May 23, 2008 10:01:57 AM
always a big deal when bill gross talks. especially about mistated inflation...
http://www.marketwatch.com/news/story/us-inflation-understated-due-trio/story.aspx?guid=%7BDED8CC4C%2D8199%2D40E1%2D93F9%2D43A3C5E0F0D4%7D&dist=SecMostCommented
Posted by: jhunt | May 23, 2008 10:18:02 AM
pmorrisonfl,
You apparently haven't noticed, but the price of oil and other commodities necessary for basic living have gone up a little since the beginning of the year. This rise has taken a lot of disposable income out of consumer's pockets and has introduced a lot of uncertainty. Most people are hunkering down and will stay in that position until they feel more comfortable financially.
It's not that complicated. Had oil and other commodities not exploded, people would be spending on lots of things, including new houses. The stock market would be on its way to infinity and beyond and I would be salivating over boatloads of stock market profits, realized and otherwise.
I don't over analyze housing via rent equivalents or other nonsense. People are not that complicated, unless they are insane and most people aren't insane on most days.
Posted by: cinefoz | May 23, 2008 10:23:34 AM
The biggest problem here now is not housing it's the commodity bubbles.
Now that oil has been identified as a bubble the market will look for other bubbles as it did in 2000.
This will tank the market.
Posted by: John Borchers | May 23, 2008 10:26:53 AM
cinefoz - I was asking about your views at that time, not about your view now. Using the present to predict the past is not what I'm looking for here, though it is what you offered, along with a side-dish of condescension. Thank you for providing me with a clear view of your approach.
Posted by: pmorrisonfl | May 23, 2008 10:35:52 AM
pmorrisonfl,
Huh? My views at that time were based on conditions at that time. That was then, this is now. I generally don't give a crap about what I was thinking about something several months ago. I don't know why anyone would unless they were doing a postmortem on a past decision. Those I do, but it's not such a formal affair. History is best savored on satellite tv, preferably by watching things blow up in an educational context.
I'm more interested in tomorrow and how I can game the system and make a few bucks.
Posted by: cinefoz | May 23, 2008 10:44:25 AM
@Vince - sure, its possible cheap credit kept rents artificially low. if this chart "corrects" itself by having rents rise, then that's an additional pinch on pocketbooks and more undeniable inflation.
Posted by: peter royal | May 23, 2008 11:11:52 AM
pmorrisonfl:
Didn't we all see this day coming, when cinefoz would be proven wrong? Remember, he was always evasive when asked why housing would "normalize" (although cinefoz would never even explain his use of that term).
http://bigpicture.typepad.com/comments/2008/02/shiller-histori.html
cinefoz's only excuse for why housing would pick up was "the wealth effect", i.e., the market would go up, thus people would buy houses.
"about housing ... yes, the market's rise will help offset it. Soon, housing will start to get better and spending will pick up even more. The wealth effect isn't limited to financial assets. And some people were ruined in the credit collapse. Market's always recover. So do people.
Posted by: cinefoz | Feb 20, 2008 4:04:39 PM"
"When the market rises, people accrue wealth. Some feel better about their situation and spend some of it. This is a wealth effect. It is a good thing. Everybody prospers.
This might have something to do with the missing V that Ross wrote about earlier today. V is starting to build steam and will take off shortly. Get ready to take off with it.
Posted by: cinefoz | Feb 20, 2008 3:34:25 PM"
Of course, cinefoz also poo-poo'd the idea that people would walk away from houses:
Strasser,
Homeowners walking away is a myth, possible propagated by a few who are judgment proof, creative writers, and the stupid who don't think very hard.
The note / mortgage and state law for a home in most states, in all likelihood, makes it unwise for a debtor to walk away from the home if money is still owed on it. If a note still has an unpaid balance after a foreclosure sale, the borrower is still liable for it.
Depending on the law and the aggressiveness of the party owed money, asset seizures and sales are a possibility. Wage garnishments are also a possibility. A lesser Hell is making the payments and hoping for the best in a few years. Or bankruptcy chapter 7.
Posted by: cinefoz | Feb 15, 2008 2:52:34 PM
Mighty convenient that now cinefoz has "higher commodity prices" to fall back on....
-------
The point of all this? Barry has been right from day 1. And all of us doomsters saw this coming. Kinda like Barry's posts re: how can anyone be surprised by the crappy numbers that keep coming out?
Posted by: Mr. Obvious | May 23, 2008 11:42:39 AM
cinefoz:
> I don't know why anyone would unless they were doing a postmortem on a past decision.
I do it to refine my thinking in order to make better decisions going forward. I'm aiming for "When the facts change, I change my mind."
You had a confident opinion contrary to my own view at the time, and my assumption was that you had a view I didn't see. I was trying to refine my assumption.
I like watching things blow up in an educational context as well. I'm just trying to also use that to avoid present day blow-ups as well.
Posted by: pmorrisonfl | May 23, 2008 11:42:57 AM
Rather than high commodity prices driving decreases in home prices, isn't it more likely that decreasing home prices are creating high commodity prices by forcing the Fed to cut rates?
Posted by: Renting in Mass | May 23, 2008 12:01:26 PM
What are the Y axis units on the price to rent chart ?
My own benchmark on this matter was that a house should sell for 100-120x its monthly rent. What does 26 mean on the chart ?
Thanks
Posted by: me2 | May 23, 2008 12:14:57 PM
One of my strongest beliefs is that Americans are not very informed about anything other than what was on TV last night. They are idiots when it comes to money. That said, I believe this statement is wrong.
I don't over analyze housing via rent equivalents or other nonsense. People are not that complicated
I talk to people about housing on a regular basis. The one thing that many americans do is a very basic rent vs buy analysis. "If I'm paying $1,000 a month in rent, could I buy a house for that?"
But then again, perhaps I only talk to the insane.
Posted by: 12th Percentile | May 23, 2008 12:20:26 PM
Mr. Obvious,
On one hand I'm flattered that you saved my stuff. You must not have much of a life.
On the other hand, (we may use up more than two hands here) had a fundamental aspect of the economy not changed, housing would be improving and people would be out looking and buying. I believe I've covered this aspect of basic economics in a lot of detail recently.
I'm a little surprised at your rigidity and your apparent lack of comprehension that the economy is a dynamic system. Maybe the name 'Mr Obvious' is self depreciating sarcasm ... and possibly should be changed to Mr Autistic or Mr Whatttt?
Posted by: cinefoz | May 23, 2008 12:23:33 PM
I wonder to what extent did access easy credit help to keep rent artificially low over the last 6-7 years.
You're kidding right? Easy credit is used to buy things, how many banks will hand out mortgages to pay rent? Rent represents the maximum amount the customer will pay based on supply and demand.
Posted by: Linus | May 23, 2008 12:33:56 PM
Mr ____________,
I just looked over what your pulled from my stuff. I sounded pretty smart. I don't know where some of that stuff comes from. Had the economy not recently started a period of speculative hyper-inflation regarding commodities, I would be sipping tea with Goldilocks. It now looks like that will have to wait until next year.
Posted by: cinefoz | May 23, 2008 12:40:30 PM
Linus,
Easy credit kept rents "artificially" low via two channels:
- The obvious channel is on the demand side. Easy access to credit allows marginally qualified buyers to buy rather than rent.
- The less obvious is on the supply side. Low rates and easy access to capital drives all sorts of construction, including residential rentals.
Combine these two and you get increasing vacancy rates and a damper on rents.
Posted by: Estragon | May 23, 2008 12:50:20 PM
"I sounded pretty smart."
I just guffawed so hard it hurt.
Posted by: Renting in Mass | May 23, 2008 1:02:56 PM
cinefoz, BR has a nice little google search bar on the site. took all of 3 minutes to compile.
All of us doomsters saw this coming, while you ranted and raved about how the market would shoot up making everyone feel rich...yet you didn't even know what a non-recourse mortgage was.
In essence, your entire premise was flawed. Surprising that you would not find it interesting to review your flawed thinking process so as to avoid the same trap in the future.
Posted by: Mr. Obvious | May 23, 2008 1:06:34 PM
It would be interesting to see a comparison of rent vs. actual cost of servicing a mortgage over this period. Last I checked interest rates were the biggest driver of the cost of owning a home - the price of the home itself hardly figures into the equation as most american home buyers borrow the bulk of the money to buy their home and are only interested in knowing (or maybe not knowing lately) their monthly payment....
Posted by: Mike | May 23, 2008 1:12:41 PM
This chart would convey more information with the addition of recession "bars" and interest rates.
Posted by: Toby | May 23, 2008 1:16:43 PM
CineFoz..
i have been on this blog since about 18 months..
there is always a bull who strays over here, trying to be a contrarion to all the bears who assemble..
we used to have FRED in past...he stopped talking much after NOV-07 meltdown...
i am glad you have converted to become a realist..
that being said....i am bearish based on macro conditions....but i am neutral based on irrational market thingy (80% of money (mutual funds, 401k, pension funds etc) has nowhere to go but in long positions, so its very natural for vertical climb...unless we really come to the day when earnings start falling from the cliff.
Posted by: techy | May 23, 2008 1:33:57 PM
