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   

Speech to the Certified Financial Analysts Institute, Annual

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

Credit, Housing, Commodities and the Economy

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What's been said:

Discussions found on the web:
  1. Estragon commented on May 21

    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.

  2. Vince commented on May 23

    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.

  3. pmorrisonfl commented on May 23

    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.

  4. mike e. commented on May 23

    I assume that rent-controlled developments pulled out of the equation?

    Looks like rent needs to go up.

  5. Mr. Obvious commented on May 23


    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….

  6. cinefoz commented on May 23


    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.

  7. John Borchers commented on May 23

    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.

  8. pmorrisonfl commented on May 23

    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.

  9. cinefoz commented on May 23


    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.

  10. peter royal commented on May 23

    @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.

  11. Mr. Obvious commented on May 23


    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).


    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:


    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?

  12. pmorrisonfl commented on May 23

    > 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.

  13. Renting in Mass commented on May 23

    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?

  14. me2 commented on May 23

    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 ?


  15. 12th Percentile commented on May 23

    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.

  16. cinefoz commented on May 23

    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?

  17. Linus commented on May 23

    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.

  18. cinefoz commented on May 23

    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.

  19. Estragon commented on May 23


    Easy credit kept rents “artificially” low via two channels:

    1. The obvious channel is on the demand side. Easy access to credit allows marginally qualified buyers to buy rather than rent.
    2. 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.

  20. Renting in Mass commented on May 23

    “I sounded pretty smart.”

    I just guffawed so hard it hurt.

  21. Mr. Obvious commented on May 23

    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.

  22. Mike commented on May 23

    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….

  23. Toby commented on May 23

    This chart would convey more information with the addition of recession “bars” and interest rates.

  24. techy commented on May 23


    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.

  25. cinefoz commented on May 23


    I’ve always been a realist. I just don’t join the pessimism crowd by kneejerk. Holding all things equal, the natural direction for the stock market is up. Money needs a place to go and going long is where it goes when things look safe. There are sell offs periodically and I love to time them right. I detest having to make the same money twice by missing a top preceding a sell off. I don’t even care if I hit the very top or the very bottom, as long as I make money on the range. I’m neither a bull nor a bear and, frankly think anyone who identifies with either is clueless.

    On top of that, sellers don’t like to lose money. They will sell only if they have to. It is not natural to sell at a loss without a good reason. Most people who own stocks are either buy and hold or traders. Most people who own stocks bought them when prices were higher or aren’t interest in selling. Those who bought at higher prices will not sell if they haven’t already. Thus, most available sellers bought in the current rise since January or March or have been holding for a long time.

    This implies the natural bottom is around the January lows. It would take a shock, such as a commodity bubble burst to bring out more sellers and a lower bottom. These people would have to sell to make margin calls. It would be a race for the door. Unfortunately, my instincts say this won’t happen until oil rises to sickening levels much higher than today.

    At some point, buyers will return and they will buy. Only gloomsters think the rest of the world gives a damn about obscure macroeconomic – statistical cause and effect relationships. Most people just want to put their savings to work and a lot of sales people want to help. I just want a part of it by buying low and selling high.

  26. Conor Neu commented on May 23

    Deutsche Bank has done a great piece called Rent or Buy on this topic that I discuss here.


    As you can see, Los Angeles is much worse off than the rest of the country, with not only a massive disconnect in rent versus owning costs, but also a lack of change in household income.

  27. Estragon commented on May 23

    This thread’s probably a goner, but if anyone’s interested in further reading, below is a link to a paper by the person who is noted as having developed the data used in the chart.

    BLS paper – Garner/Verbrugge

  28. Estragon commented on May 23

    Sorry, fingers not fully connected to brain. The paper references prior work by Gallin but the paper itself is authored as attributed in the link.

    The chart is captioned “adjusted as in Gallin(forthcoming)”. I guess will have to wait until forthcoming to find out just what the adjustments are.

  29. Lord commented on May 23

    The y axis is essentially the inverse of the capitalization rate, 20 – 5%, 25 – 4%, with the average about 21.5 – 4.65%. With real mortgage rates about 3% (conv) to 4% (jumbo) prices are not that extreme although loan availability and borrower willingness are overstretched.

  30. Matt commented on May 23

    Could we get a spellcheck run on the last few posts?

    Would prefer not to forward to colleagues with typos…


  31. me2 commented on May 24

    The y axis is essentially the inverse of the capitalization rate, 20 – 5%, 25 – 4%, with the average about 21.5 – 4.65%.

    OK, so that chart says that on average the yearly rent should be 4.65% of the value of the property.

    So for a $100K house, that would be $4650 or less than $400 per month. That is a price to monthly rent ratio of 250x, which is way high. I think Shiller has a chart that shows it to be about 100x.

  32. The Wise Fool commented on Jul 16

    The housing boom was fueled by historically low rates and the easing of credit to n on-qualified buyers. The administration attempted to shift the renter/owner ratio in favor of higher homeownership as a means to build wealth and retirement funds for those of lesser means. The result was a surge in demand at the lower end of price spectrum which pushed demand in each price tier. This also sucked traditional renters out of the rental market and suppressed rents since 2000. Thus the chart above was affected on both ends by the increasing prices and flat to decreasing rents. It will take time to absorb the increased stock as the low end buyers, who entered the market from 2000 to 2006 will likely never return to the market. However, the sell off of foreclosure by he bond trustees for mortgage backed assets is being done with no ramifications for loss. Properties are trading at the low end of the spectrum for as little as 30% to 40% of prior values. This is bringing wise investors back into the market and clearing the oversupply. There is still a market hangover that will likely last for the next 6 to 9 months, excluding the most frothy markets, but once the excessive foreclosures are gone, the next tier of sellers will be significantly more price sensitive and prices will stabilize. Price stability and general inflation will cause a rebound in the market.

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