DeForest McDuff's Monthly Market Comments

Price to Rent Ratios, All Available Cities

Calculation Details

The charts below display price to rent ratios for all cities for which price and rent data are available. I use home price indices from two sources:

These housing indices are calculated using a repeat-sales technique, so they calculate average appreciation over time using consecutive sales at the same homes. The Case-Shiller indices are thought to be the most accurate, but the OFHEO indices are available for more cities and go all the way back to 1982 (versus 1987 for Case-Shiller). Both indices yield similar results, though the Case-Shiller indices are generally showing sharper current price declines.

The rent data come from the housing component of the Consumer Price Index provided by the Bureau of Labor Statistics web site.

Price to rent ratios are calculated over time by dividing the price index by the rent index for each city. Because all indices are reported without units (i.e., they are generally constructed so that the index=100 in a particular year), I calibrate them to their June 2007 levels using an article from Fortunate Magazine: "Where housing is headed".

In order to provide some visual consistency across the charts, I've labeled the price to rent ratios at 15 and 25 in red as a kind of "high" and "low" barometer. Note however that the long-run price to rent ratio should not necessarily be the same in all cities, just as we would not expect the long-run P/E ratio to be the same for all types of stocks.

Below each price to rent ratio chart, I have included an additional chart which displays the year-over-year changes in home prices and rents. By definition, the price to rent ratio increases when prices are rising at a higher rate than rent growth. In many of the "bubble" cities (Los Angeles, Miami, Phoenix, etc..) we see explosive price growth without a corresponding increase in rents.

Click on each chart for a link to a sharper image.