by Calculated Risk on 2/02/2023 09:45:00 AM
Today, in the Calculated Risk Real Estate Newsletter: Inflation Adjusted House Prices 3.8% Below Peak; Price-to-rent index is 6.1% below recent peak
Both indexes have declined for six consecutive months in real terms (inflation adjusted).
People usually graph nominal house prices, but it is also important to look at prices in real terms. As an example, if a house price was $200,000 in January 2000, the price would be almost $339,000 today adjusted for inflation (69.5% increase). That is why the second graph below is important – this shows “real” prices. …
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.
Note that OER is lagging behind other measures of rent.
Here is a similar graph using the Case-Shiller National and Composite 20 House Price Indexes. This graph shows the price to rent ratio (January 2000 = 1.0). The price-to-rent ratio had been moving more sideways but picked up significantly following the onset of the pandemic.
On a price-to-rent basis, the Case-Shiller National and Composite 20 indexes declined again in November for the sixth consecutive month. The price-to-rent index for the National index is off 6.1% from the recent peak, and the Composite 20 based index is off 7.7%.