Buying and renting in the USA

I came across this chart on Bloomie this morning: its their Rent to Price Index, which compares the median asking sales price vs asking rent. It’s sourced from the US Census Bureau and also includes a housing affordability index, which I’ve removed because I want to ask some questions about the dynamic between renting and buying:

 

The divergence since the 2007 top in US house prices is very clear, with rents stabilising and forming a large gap to house prices.

Is the current divergence meaning house prices are too low or rents fairly priced? Remember, 30 year mortgages in the US (which are mainly fixed) are at near record lows – just 3.88%! For comparison, the average standard variable mortgage rate in Australia is 6.7%

Next,  look at the surge in rental costs from 2001 onwards, which diverged during the housing bubble, before prices caught up – are surging rents are sign of house bubble? It would appear so in New Zealand at least, a market worth watching to see what happens when a government tries to re-inflate house prices whilst curtailing land releases.

Finally a third question rises: why did this relatively stable market (from 1990 to 2000 rents and sales prices were both on similar trends) explode so suddenly from 2001 onwards? I think a thorough reading of the Unconventional Economist’s work on the US housing bubble is required reading.

Australian property bugs need to take heed of these rent/buy dynamics, as again, its the volatility and reflexivity that drives markets, not necessarily the magnitude of price changes.

 

Comments

  1. A median rent of USD 683/month = USD 160/week.

    A median house of USD 150k has an annual mortgage interest component of 150k * 4% + (council rates/maintenance) 4000 = 10k ~ USD 190/week.

    Renting in the US then seems to be still cheaper than buying. Either rents have to rise or house prices have to fall further long term.

    • Diogenes the CynicMEMBER

      Probably rents will rise a little and house prices will fall a bit further. I do not think the bottom is in house prices except perhaps for markets where they are literally giving them away (Detroit)..

      • Why is it always assumed that rents cannot crash as well?

        The housing bubbles around the world are just a pimple on the gigantic 40 year credit bubble that is now deflating.

        If the hyper-deflationists are correct then we could see rents/wages and house prices return to what they were in the 1970s.

        • I was priced out in 2004. I’ve been waiting a long time for the crash and am starting to believe it will never happen.

          • It indeed may never happen in absolute terms, but it will in relative terms (to wages). That is of little consolotion now for anyone in your situation. What about just moving to a cheaper place or country if possible ?

    • That’s not what the ratio is useful for.

      The ratio is 144,000 / (683 x 12) = 17.56

      It is analogous to the share PE ratio in shares. It is one of the ratios you can use to assess whether the property is a good investment.

      I follow the value for Sydney, Manly and Bondi. The value is around 20 now, but it was as high as 29 in 2009.

      The higher the ratio the less attractive the investment.

      -gt

      • For AU, an economically sustainable ratio would be 12 given mortgage interest rates of 7%. A long way too go then. For the US and 4% that ratio should then be 16, so a slight downward movement of prices would get them in line.

  2. Interesting chart from a short-term perpective, however to draw any serious conclusions you would need to look back at these ratios over the last 5 or more decades.