Date: Wed, 8 Jun 2005 06:54:00 CST
From: "Mike Craney" 
Newsgroups: misc.invest.financial-plan
Subject: Re: conservative home buying
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"Will Trice"  wrote in message
news:42A63A2B.9000205@paragondynamics.com...
>
>
> Douglas Johnson wrote:
>
> > There was a national news show that claimed 55% of the new loans in
California
> > are interest-only ARMs.   Tad (I think) said that rental cost is is down
to 55%
> > of ownership in the area.  This is a ticking time bomb.
>
> So what is a good measure of the valuation of the housing market?  An
> article on Saturday from a New York Times writer attempted to compare
> housing markets to stock Price/Earnings ratios with the ratio for
> housing being Price/annual rent.  Then the writer stated that some
> housing markets have a ratio of 35 which the writer evaluates as high
> and due for a correction, and some have a ratio of 10 which the writer
> said was low.
>
> But annual rent is not equivalent to earnings, so maybe a more
> appropriate comparison might be Price/Sales.  Speakly broadly, a P/S
> ratio of 1 is generally considered fairly valued for a stock.  But not
> many rentals rent for their full purchase price in a single year.
> Certainly mine doesn't.  Are either of these then valid measures of
> valuation?
>
> Secondarily, is the rental business then a bad business to be in?  It
> looks like my P/S is 13.  I would never buy a stock with that P/S...
> OK, that's just my situation.  In the rental business, you're generally
> said to be doing well if you are renting for 1% of the value of your
> property per month.  That gives a P/S of a little over 8.  Checking the
> stats on some REITs, it looks like they do indeed have P/S ratios around
> 8.  So for a value investor, are REITs a good investment?  Or does P/S
> not apply to REITs or real estate investing in general for some reason?
>
> -Will

ISTM that there are a couple of these ratios which could indicate an
overbought real estate market. Price/Rent certainly applies, since if rents
are cheap compared to home costs, the entry part of of the home market
should see some decline in demand. Forbes has also used a Price/Average
Annual Income in a given market to determine the point where homes simply
become so costly that few can buy, or (even worse) that the buyers move to
no-down-payment loans or interest only loans to afford a house.

Mike
>


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