Self-promotion alert: price-rent ratios edition

Hey Barbara and Justin,
How about taking it one step further and put together the "Kiviat-Fox Housing Price Direction Indicator" that would include both the Price/Rent ratio and the Median Price/Median Income ratio.

I'm not sure how one mathematically combines two ratios to create a telling number, but I'm sure someone out there does... is Bill James available?

nice article Barb... but I'd like to add a caveat that doesn't appear in your piece.

Specifically, the study you cited assumes that rents are not inflated as a result of the home price bubble. To suggest that the rental market will not adjust to increased residential real estate prices is, at the very least counter-intuitive, and there is a very strong possibility (especially given the recessionary economy) that rents will go down in the coming year, making the rental/home price ratio far less encouraging than it is now.

Pluk, the 15 year average should be used as a point of comparison. That 15 year avg. should even out some of the bubbles.

re: the Gandel piece...
throughout the piece, he equates delinquency rates with foreclosure rates -- but they aren't the same thing. Simply being behind in a mortgage payment makes you delinquent, but that doesn't mean that you'll go into foreclosure.
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the piece also suggests that phone bill payment data is relevant to whether one would default on one's mortgage. While phone bills may be a good way of figuring out who is likely to pay their mortgage late, I don't see any reason to believe that simply because one doesn't pay their phone bill on time every month that they will default on a mortgage -- paying all your utility bills "on time" is a measure of how anal a person is, rather than how fiscally responsible they are.
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(I'm the kind of person who doesn't pay my phone bill "on time", but have never had my phone shut off for non-payment (or had bounced a check in the last 25 years.) Combine that with the fact that I assiduously avoid any kind of debt and pay cash for everything (if I want something, I save up for it) and I appear "non-creditworthy. This was especially annoying when I bought my second house. I owned my first house free and clear, and when I put it on the market it was easily worth 2.5 times what the next house cost. Yet, despite the fact that I had more than sufficient collateral to cover the price of the new home (and was putting down a 25% down payment), my lack of a good credit score meant that the only loan I could get was usurious.
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(I wound up borrowing money from family members, and paid them back as soon as the old house was sold two months later).
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Back in the "good old days" when banks knew their customers, and made loans based on far more rational criteria, I would have been able to get a good rate on a short term loan -- and IMHO the centralization and depersonalization of the financial system is one of multiple factors in the financial crisis we've undergone.

Pluk, the 15 year average should be used as a point of comparison. That 15 year avg. should even out some of the bubbles.
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the study compared 15 year average home prices to current, not "averaged over time" rents. If, as I suspect, rental prices are higher than they will be in the next year, using current rental prices to judge how far home prices will fall will result in an underestimation of the "bottom" of the market.

I would love to see Q2 2009 Price to rent ratios for Chicago...I am looking to buy a new home. Thanks!