Price-Rent Ratio Still at Bubble Levels in DC

• August 10th 2009

by Will Smith

The Center for Economic Policy Research and the National Low Income Housing Coalition have published a report that considers the affordability of housing prices with respect to rents. The so-called price-rent ratio is an important (but often overlooked) metric because it assesses real estate prices according to basic supply-demand fundamentals.

The report finds that housing prices in many markets — D.C. included — are still at bubble levels. Historically the price-rent ratio of a market in equilibrium is 15-to-1. That is, the median sales price of a home is 15 times the median annual rental income that the same home could produce. So a house that sells for $150,000 would generate $10,000 per year in income if rented out. During the peak of the bubble a couple years ago, the ratio ballooned to 25-to-1 in many markets. Anything over 18 is considered a bubble.

As of April, the price-rent ratio for the Washington, D.C. region was 21.5, putting it solidly in bubble territory. D.C wasn’t alone; 13 of the 27 biggest markets also have price-rent ratios north of 18. See the full list below:

Some market pessimists argue that real estate prices will continue to fall until the price-rent ratio is brought back in line with historic levels.

This article originally published at https://dc.urbanturf.com/articles/blog/price-rent_ratio_still_at_bubble_levels_in_dc/1221.