NYT: Is Your House Overvalued? ("rent ratio")

[DeepModem Mom]

Is Your House Overvalued?
By DAVID LEONHARDT
Published: May 28, 2005


Four days after Alan Greenspan, the Federal Reserve chairman, pronounced the nation's housing market frothy, a new report on home prices this week suggested that he might have been understating the situation. Even after one of the steepest run-ups on record, home prices have jumped another 15 percent over the last year.

While gleeful about their apparent riches, homeowners in many of the hottest areas are also growing concerned. How, exactly, does one know if the family palace is sitting atop a bubble about to burst?

The answer might have less to do with the sale price of your neighbor's house and more to do with something most homeowners ignore: the local rental market.

The easiest way to gauge a home's value is to borrow a tool from the stock market. In the most basic method of analyzing a stock, investors look at its price-to-earnings ratio, a comparison of a company's share price with its annual profit....Houses have their own version of such a ratio. Take the price of a typical house in an area, divide it by the amount that house would cost to rent for a year and the result is what might be called a rent ratio, an imperfect but still telling measure of real estate.

That ratio today shows that housing is not nearly as overpriced as stocks were in the late 1990's. But many areas are showing signs of irrational exuberance....


http://www.nytimes.com/2005/05/28/business/28home.html?oref=login

[Warpy]

1. A quarter of the new construction here in central NM is being sold

to investors from California. A third of the housing overall is being sold to investors. There hasn't been much of a housing bubble here because developers are slapping up cheap little houses as fast as they can to satisfy investor demand, something you'd think those investors would notice, but the herd mentality seems to be at work.

My shabby little casita in a bad 'hood will still rent for nearly twice what I pay in PITI every month. My mortgage is far less than I'd pay for a two bedroom apartment in an area that isn't a total freak show.

I have no idea what's going to happen when the bottom falls out (and it will). I know the flood of pristine new houses dumped by frightened investors will depress values in the outer suburbs. I don't know what it'll do to my area, one I consider golden because of its proximity to all the urban amenities, including jobs.

I'm sure it'll be fun to watch.

[MeDeMax]

2. the bubble will burst...

when people who borrowed against their over valued homes run out of equity and dont yet have a job.

Its sell or go bankrupt, since you can't do either these days...

[The Jacobin]

3. Paul Krugman (economic genius) just wrote about this

http://www.nytimes.com/2005/05/27/opinion/27krugman.html (registration required )

Running Out of Bubbles
By PAUL KRUGMAN
Published: May 27, 2005

Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.

I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.

In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

Now the question is what can replace the housing bubble.

(snip)

[Gregorian]

5. Thanks for that article

If you want my "nongenius" opinion, I would say the replacement for the housing craze will be savings. I don't see a replacement. There isn't one. There doesn't have to be one. I think our time is over, in this country.

[Gregorian]

4. There is no "local". It's a national market.

And therein lies one of the reasons for inflated prices. Thanks to the internet, people in Vermont can get up in the morning and see what is on the market in California. That's when I saw the prices skyrocket. No local could ever afford some of these properties. But someone in San Francisco, or New York could. And whether it's acreage, or waterfront, or political location, each place has it's benefit, and associated price. There is a lot of money floating around.

edit- I was thinking of unique properties when I posted this. As for the average home, yes, there is an artificial bubble. No doubt. It started after people saw areas of value increase, and began wanting that for themselves. Homeowner see; Homeowner do.