Wednesday, August 04, 2010

House prices vs. rents

Nominal home prices vs. nominal rents:


After yesterday's blog post, in which MacroMarkets LLC suggests national home prices are actually undervalued, I decided to post another home price graph on my website. This one compares home prices to owner-equivalent rent inflation (i.e. nominal home prices vs. the nominal amount they could rent for). Like my original housing graph, the price vs. rent graph suggests national home prices are still overvalued.

Also, despite the fact that Robert Shiller is chief economist at MacroMarkets LLC, his own graph available in a spreadsheet at irrationalexuberance.com suggests that home prices are still overvalued compared to their historic inflation-adjusted norm.

The owner-equivalent rent index is available at http://data.bls.gov/cgi-bin/srgate by entering series id CUUR0000SEHC.

8 comments:

  1. It would be interesting to see this broken down by region.

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  2. It would be interesting to see a home ownership cost versus rent graph. With interest rates approaching zero the cost of ownership at any given price point is at an historic low.

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  3. James, much credit to you for responding to the comments and creating posts that enhance and build on the discussion!

    One question for you. You mention that Shiller's "own graph" suggest home prices are still overvalued. When I look at the graph and then "add a trend line" to "home prices", then home prices are indeed below the trend line now, which suggests they are undervalued, no?

    Thanks again for your efforts!

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  4. Insightful posts James. Thanks.

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  5. James, this is a fantastic blog. I want to include it in the Zillow People's choice award "Best DC Blog" competition that is starting soon. You in? If so, email me so I have your address, and I'll send you all the info.

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  6. Weird, it erased my email: bestblog@zillow.com

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  7. JAC said...
    "One question for you. You mention that Shiller's 'own graph' suggest home prices are still overvalued. When I look at the graph and then 'add a trend line' to 'home prices', then home prices are indeed below the trend line now, which suggests they are undervalued, no?"

    Are you including the bubble period in your trend? If you've got a 110-year period of relatively flat prices (adjusted for inflation), followed by a huge and temporary bubble, of course the trendline will be upward sloping. The bubble distorts the trendline's slope.

    With my graphs I measure the pre-bubble trend only, to avoid any distortion. And surprise, surprise! It gives me a slope that closely matches the change in rental prices.

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  8. JAC,
    I have scheduled a more detailed response to your question to appear as a blog post on Monday.

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