Home Price-to-Rent Ratios Show Signs of a Bottom

When evaluating where we are in the housing cycle, it is often useful to evaluate fundamental valuation metrics and compare current trends versus historical averages.  Below is a graph (click to enlarge) depicting the national price-to-rent ratio, which depicts how homes are trading relative to their rental values.  This metric is similar to the P/E (price/earnings) ratio typically used in analyzing the stock market.

This graph uses the Case-Shiller Composite 20 and CoreLogic House Price Index, and sets the baseline period at January 1998, which is assigned a value of 1.0.  The current ratio (as of October 2011) on both indices is at 2000 levels, indicating that we are very close to long-run historic average metrics.  While foreclosures/short sales (lagging economic indicators) still account for a significant share of existing home sales, the good news is that delinquency rates (leading economic indicators) are gradually diminishing.  As such, we can expect home prices to bounce around gently for several months, then gradually start to recover based on improving fundamentals.

 

 

 

 

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Median Home Price Falls Two Months in a Row

David Haldane’s piece in this week’s Los Angeles Business Journal discusses the continuing decline in local median home prices.  Haldane quotes me fairly liberally, and then in the end, pits my views against my good friend and colleague Chris Thornberg.  And all along I thought I was the pessimist.  Link below:

http://www.labusinessjournal.com/article.asp?aID=145424

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