Rent vs Buy Datapoint of the Day

How do we know we're in a housing bubble? One way of knowing is by looking at house prices, which during the bubble were rising much more quickly than rents. That was clearly unsustainable. But today, in a CPI FAQ, the BLS uncovers a startling statistic:

According to the National Association of Realtors, between 1983 and 2007 the monthly principal and interest payment required to purchase a median-priced existing home in the United States rose by 79 percent, much less than the rental equivalence increase of 140 percent over that same period.

Now I'm not one to pay overmuch attention to the NAR, they're an advocacy group more than a source of reliable statistics. But I do actually believe this, because if you look closely they're not saying that rents have risen more than prices. Instead, they're saying that rents have risen more than the cost of buying a house, which is different, and which is largely a function of falling mortgage rates over the past 25 years.

All the same, for rent-vs-buy calculations, it's precisely the mortgage payments that you'll want to be looking at. And according to this, in order to get back to the ratios of the early 1980s, house prices would have to almost double from their 2007 levels, with rents not moving at all.

Which does raise the obvious question: why on earth was anybody buying a house in 1983?

(Via Thoma)

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