Are Houses Cheap Right Now?
Originally published on Mon December 10, 2012 3:03 pm
Houses are much cheaper than they were six years ago. Of course, six years ago was the peak of the biggest housing bubble in the history of America.
So does "much cheaper than they were six years ago" mean cheap? Does it mean "cheaper, but still overpriced"? Or does it mean "about right?"
As we noted last year, there are a couple of helpful ways to ask this question. And the answers depend partly on where you live. Here's what those numbers mean, followed by a list of key numbers for dozens of cities around the country.
1. What's the cost of buying versus renting?
This is called the price-to-rent ratio. It's the the cost of the median home divided by a year's median rent.
The classic rule of thumb is that when the ratio is under 20, buying probably makes more sense than renting (assuming you have a down payment, plan to live in the house for five years or more, etc).
But over the long-term, the ratio has consistently been higher in some places and lower in others. So it's worth comparing where your city is now to where it was before the bubble. A ratio that's higher than historic norms suggests prices may have further to fall (or that an area has gone through some kind of fundamental, long-term change).
2. How much do houses cost relative to family income?
This is called the price-to-income ratio. It's the median home price divided by median household income.
During the boom, this ratio shot way up, as home prices rose faster than incomes. Now, in most places, this ratio is below its historical norm, suggesting houses are a good buy.
Update: An earlier version of this post misstated the price-to-rent ratio for Tampa. Thanks to the commenter who pointed out the error.
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