Here is an update on the price-to-rent ratio using the First American CoreLogic price index released yesterday for house prices through January.
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.
The following graph uses the First American data …
Click on graph for larger image in new window.
This graph shows the price to rent ratio (January 2000 = 1.0).
This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.
Also, OER declined slightly again in February. The price index has declined 6 of the last 8 months, although most of the declines have been very small. With rents still falling, the OER index will probably continue to decline – pushing up the price-to-rent ratio.