The nationwide house price-to-rent ratio has hit its highest level since 1975.
William R. Emmons, an economist at the Federal Reserve Bank of St. Louis, shares details of a key metric for explaining the current state of the housing market.
"The nationwide house price-to-rent ratio, a widely used measure of housing valuation that is analogous to the price-to-dividend ratio for the stock market, is at its highest level since at least 1975," writes Emmons.
"Rapid house price appreciation since last May, combined with a slowdown in rent growth, resulted in a surge in this ratio," explains Emmons for the combination of forces at work in the housing markets. "By February 2021, the national house price-to-rent ratio had surpassed the previous peak reached in January 2006; in March 2021, the ratio was 1% higher than its level at the peak of the housing bubble."
What does that all mean? According to Emmons, the imbalance in the house price-to-rent ratio suggests that the average house is selling for "quite a bit more" than its "fair value."
The article includes more details on the methodology for calculating the house price-to-rent ratio, an explanation of the "fair value" of a house, and a note about the difference between the current housing market and the conditions that led to the subprime meltdown and Great Recession of 2007 to 2009.
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