A Key Housing Market Metric Hits Uncharted Territory

The nationwide house price-to-rent ratio has hit its highest level since 1975.

June 4, 2021, 7:00 AM PDT

By James Brasuell @CasualBrasuell

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caswell_tom / Flickr

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.

Monday, May 24, 2021 in Federal Reserve Bank of St. Louis

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