Real House Prices and Price-to-Rent Ratio

Real House Prices and Price-to-Rent Ratio

by Bill McBride on 6/26/2012 

Nick Timiraos at the WSJ has a nice summary: Why Home Prices Are Rising Again (According to Case-Shiller)

It wasn’t hard to see this coming: Home prices rose in April after a spring that bought more buyers chasing fewer homes.

Yes, this was pretty easy to see coming. A key question is: Did nominal house prices bottom in March or will there be further price declines?

I think it is likely that prices have bottomed, although I expect prices to be choppy going forward – and I expect any nominal price increase over the next year or two to be small.

I’ve seen some forecasts of additional 20% price declines on the repeat sales indexes. Three words: Not. Gonna. Happen.

Others, like Barry Ritholtz at the Big Picture, have argued that we could see an additional 10% price decline in the Case-Shiller indexes. I think that is unlikely, but not impossible. The argument for further price declines is that there are still a large number of distressed properties in the foreclosure pipeline – and that there are over 10 million property owners with negative equity, and that could lead to even more distressed sales. So even though prices are pretty much back to “normal” based on real prices and price-to-rent ratio (see below), the argument is that all of these distressed sales could push prices down further. Also, Barry argues that prices following a bubble usually “overshoot”.

Those are solid arguments, but I think that some of the policy initiatives (refinance programs, emphasis on modifications, REO-to-rental and more) will lessen the downward pressure from distressed sales – and I also think any “overshoot” will be in real terms (inflation adjusted) as opposed to nominal terms. It is probably correct that any increase in house prices will lead to more inventory (sellers waiting for a “better market”), but that is an argument for why prices will not increase – as opposed to an argument for further price declines.

My view is prices will be up slightly year-over-year next March (when prices usually bottom seasonally for the repeat sales indexes). Some analysts see a small decrease (like 1% to 2%) over the next 12 months, but that isn’t much different than a small increase (when compared to forecasts of 10% or 20% declines).

And here is another update a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index.

Nominal House Prices

Nominal House PricesClick on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through April) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, and even with the recent small increase, the Case-Shiller Composite 20 Index (SA) is back to March 2003 levels, and the CoreLogic index (NSA) is back to May 2003.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000, and the CoreLogic index back to February 2000.

As we’ve discussed before, in real terms, all of the appreciation in the ’00s is gone.


In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000 levels, and the CoreLogic index is back to April 2000.

In real terms – and as a price-to-rent ratio – prices are mostly back to late 1990s or early 2000 levels.


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