January 13, 2008

This one chart should explain the Great Housing Crash - the OFHEO historical house price to rent ratio


And yes, we're going all the way back down.

Regression to the mean is a bitch.

It's the P/E stupid. It will always be P/E stupid.

No matter what realtors on commission would have you believe.

Want to see this ratio in action? Take any random house in the world, figure out what it would cost to "own" per year if you bought today, and subtract what it would cost to rent. You'll see you could rent for a fraction of what it would cost to "own". And that's the problem.

25 comments:

WINGS said...

I feel a sense of urgency and indignation that things are so out of hand.

But, on the other hand, I'm very happy and excited to see things crashing back to normality.

That high school educated dolts made a lot of money as realtors and brokers makes me furious.

But I like that fact that now they will have to get real, $12.00 an hour jobs and not live so luxuriously while I slave away honestly for my pay.

I feel good knowing that history punishes excess. The honest man and woman will be vindicated.

Let the caveat emptor-less buyers hump themselves in front of the shyster realtor, thinking their getting such a smoking deal that it makes them horny (like that picture on this site).

WTF?

BigDaddy63 said...

Keith,

That chart is reminiscent of my favorite roller coaster.. the first part is great as you ascend towards the sky.. once you reach the peak, th view is breath taking to behold and you are on top of the world. Then is a very scary and fist clenching plunge to the bottom.


Guess where we are now?


Buckle up cowboy!

Anonymous said...

You say we are going all the way back down, but since they are lowering wages it seems like people will not be able to pay as much rent in the future. Therefore, it seems like it should go down even FURTHER before it bottoms.

Bill said...

After looking at this graph and trying to figure out what it is plotting, I am still confused. It looks as though the ratio values run between 2.0 and 3.5--and we're taking the ratio of the OFHEO housing price index for the U.S. and dividing it by the cost of rent. However, there are some key questions here that would help clarify the meaning of this graph, and hopefully someone can point this out:

1. What are the units of the OFHEO house price index?
2. What are the units of the cost of rent? I'm assuming this is the cost of rent over some fixed time frame (a month, a year, multiple years?)

If these two questions could be answered, I think this graph would really become much more meaningful. Right now it doesn't really give anyone any insight above and beyond the fact that we have broken above a historical long-term average (which is significant). Unfortunately the graph doesn't explain enough on its own...

Anonymous said...

Yeah but it's different this time.

Anonymous said...

Does that graph include the data from jumbo mortgages? Me thinks not.

Martin said...

Which rent vs. own calculator do you recommend?

Anonymous said...

Keith, and just WHY wouldn't housing stay stagnant and rents catch up instead -given Bernanke's hyperinflation policy?

Tangelo Mozilo said...

Anonypuss 10:14 said . . .

"Keith, and just WHY wouldn't housing stay stagnant and rents catch up instead -given Bernanke's hyperinflation policy?"

------------------------------

The mighty Tangelo will field this one.

You see, anonypuss, the price of housing is dictated by how much people can afford to pay for it.

Therefore, unless the increase in M3 results in a concomitant wage inflation (which it never does, nor will it this time), it will have no effect on the price of real estate.

Anonymous said...

I'd rather pay twice as much to own because I can paint the walls any color I want. I also look down on you renters

Seattlemoose said...

This graph is the one that absolutely convinced me of the SEVERE correction in prices that needs (and is now just starting) to take place.

This graph represents truth. EVERYTHING the RE industry shills say is pure BS...smoke and mirrors designed to keep the "transaction parasites" in BMWs and designer clothes.

Anonymous said...

Regression to the mean is a bitch
--------------------------

Keith,
Historically, when you have gigantic bubbles of this sort, it has always gone BELOW the mean. The book THE COMING CRASH IN THE HOUSING MARKET by John Talbott talks about this. Its like a pendulum swinging, and when it swings in the other direction, it goes below the mean.

Anonymous said...

What you mean Hillary wont be able to save us/ Its just a blip real estate always goes up. Or the most common one--my house is paid for and I have a job so I will be o.k.---ha! Its going to get bad kids....

California is Burning said...

"First agent will close this deal"

and look at the sales history.

http://www.redfin.com/stingray/do/printable-listing?listing-id=1282430

It was Bill Clinton... said...

It all depends on what you mean by "did" but put this in your pipe (just facts, I am in Asia so the republican/democrat distinction is nonsense from afar). Bill Clinton signed the legislation eliminating the glas stegall act therefore permiting the merger of banks and investment banking houses. This all led to the present mania (CDOS, MBS etc..). So go ahead idiots get another member of your ruling dynasty to screw your more........ha, ha, ha..........

Anonymous said...

Right on Keefer.
Right on..

bob said...

I *so* wish I'd seen the October 2005 version of this in October 2005 :(

Anonymous said...


Keith, and just WHY wouldn't housing stay stagnant and rents catch up instead -given Bernanke's hyperinflation policy?


That could only happen if wages doubled so people could afford to make the mortgage payments. People making $20/hr cannot afford $300K houses. There is also the problem of supply/demand. If rents doubled, more people would be forced to consolidate under one roof. That would create a surplus of rental units and prices would be forced back down. You can see what the high housing prices are doing to California. Businesses are moving to Texas. There is nothing forcing those companies in California to stay there and pay engineers $120K when they could get an engineer for $80K in Texas.

Anonymous said...

so, looking at that chart, it seems to say there should be about a 30% adjustment coming. Or am I misreading it?

Anonymous said...

I'm renting a $600,000 house for $2500 per month and loving it. I get dirty looks from the neighbors all the time, because they know that I know I'm paying a fraction of what they are except I'm not tied to the ball and chain. I'm sure most of them are paying $5,000 per month on 100% financing. The best part is that most people I have over don't even know or care that I am renting. The best part will be when I buy one of my neighbor's houses as a REPO 2 years from now for 400K....

Anonymous said...

Well, in fact, this chart being a ratio, there's more than 1 way down; the price of renting could go UP while desperate homedebtors seek new income to cover their asses.
But we all know it will be the other way around, because "for rent" signs are gonna multiply, because said homedebtors can't continue to lose money not selling this house.

Hey! That makes the chart go up again!! Then... Yeah, you guessed: Home prices has to go Way Down to offset this and come back to normal ratios. Dear Lord we're so doomed

Anonymous said...

I'm renting a $600,000 house for $2500 per month and loving it. I get dirty looks from the neighbors all the time, because they know that I know I'm paying a fraction of what they are except I'm not tied to the ball and chain. I'm sure most of them are paying $5,000 per month on 100% financing.

-----

A $600K mortgage is not $5000 a month. At 6.5% it $3800 a month. If it is 100% financing, it's all interest so it's all tax deductible. If you are in a 35% bracket that $3800 becomes $2470. Add in say $500 in taxes (again which is $325 after the deduction) and the FBs are paying just slightly more than you per month.

So really you are the sucker in this situation my friend. For a $600K home, the most you should pay in rent is $2K. I rent a house that was purchased for $498K last leay and I pay $1500 in rent.

keith said...

$600,000 at 6.75 (good luck getting that rate or a jumbo btw) is $3900 a month. Add in property taxes, expenses, homeowners association of say $1500 a month (make up your own # here) and you're at $5,400 a month

Income tax savings at 28% bracket would be $1000 a month, grand total of $4400 a month, renter is paying $2500 a month.

Now, for the real fun, assume property will lose 10% in value this year or $60,000, which is $5,000 a month

Total "ownership" cost of $9400 a month for 2008, vs. $2,500 to rent.

Get it now?

Anonymous said...

Thank you Keith. That guy obviously owns an overpriced home and is trying to justify his mistake. Its funny how when one of theses people speaks up they tend to overlook property taxes, public facilities taxes, home owners insurance, maintenance, ect... Plus I'll bet the renters land lord is paying water, trash and landscaping.....some people just have their blinders on.

danimal said...

Hey, Keith...don't forget...even bitter renters get a "standard deduction" of $10,700 = $250 per month in "savings" @ 28%.