Behind the Prices

Two ways to look a bit deeper into homes prices are comparing renting to buying and looking at real or inflation adjusted prices.  The charts give pictures of both.   Taking inflation out of home prices doesn’t change the big picture very much — there was still a boom and a bust and there is nothing in the current numbers that offers an upbeat forecast of the future.  Home prices are way down from their peak but remain higher than the 1990s when they were roughly stable. Moreover, since inflation has been taken out of these numbers, we can’t blame the overall economy, inflation or the Fed as we look at the recent past.  If any, the inflation-adjusted numbers suggest that housing is still suffering the fall out of the financial crisis.

Nominal and Real Home Prices Compared

S&P/Case-Shiller Home Prices: Nominal and Inflation-Adjusted

The Rent:Buy chart is more hopeful.  The average ratio of rent to buy over the entire period since 1987 is about 89.5 (the thick black line) where the ratio was scaled to 100 in January, 2000, the same base as used for the S&P/Case-Shiller Indices.  The chart shows that homes were relatively cheap in the 1990s before the boom and relatively expensive in the 2000s but have now come close to average. If this chart is taken as gospel, we are almost in balance. Of course, there is nothing that says we should stay at the balance or that home prices won’t overshoot the average in the other direction. In fact, some argue that the weak economy and lack of consumer confidence will push us towards a nation of renters. Were that to happen, house prices  might see further declines and renting would be relatively expensive again.  All in all, the chart doesn’t forecast any specific outcome and does suggest that by one measure things are not very extreme.

When to Rent or Buy

Rent-Buy Ratio


Data background — inflation is measured by the US Consumer Price Index (CPI).  The Rent:Buy chart uses the US CPI homeowners rental equivalent index as the measure of rental expenses; an approach first used by economists at the San Francisco Federal Reserve Bank a few years ago.  The S&P/Case-Shiller Home Prices used for these charts is the 10 city composite which goes back to 1987,  longer than the 20 city composite. All data are not seasonally adjusted.

The posts on this blog are opinions, not advice.
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  2. By Should I Buy (This) Real Estate? « Jason Kwok on November 6, 2011 at 1:56 am

    […] There are several arguments that point to the possibility that housing prices will soon increase. David Blitzer, Chairman of Standard and Poor’s Index Committee, explains that the housing market is […]

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