Price-to-Rental Ratio

One of the cornerstones of my analysis of the housing market is the relationship between income, rent and house prices. When prices rise to where it is less expensive to rent, people who do not get caught up in the irrational exuberance of rising prices chose to rent rather than buy. From the graph above you can clearly see the last two bubbles: one in the late seventies caused by rampant inflation, and one in the late 80s caused by a booming economy and simple irrational exuberance. Our bubble is obvious.

We see “napkin” calculations on posts on this blog all the time. Someone will pick a somewhat arbitrary year when prices were “normal” and proceed to calculate how much it should be worth today based on inflation, etc. It is clear from the graph above that prices were too high back in 2000. By 2002, we were at the top of a minor bubble. By 2004 we were at the top of what would have been an unprecedented real estate bubble. Then, the Option ARM came along and sent prices even higher.

My premise is simple: prices will fall back to the historical relationship between prices and rents. It will because it must. Unless people suddenly start wanting to stretch to by depreciating assets, there won’t be very many buyers until we get back to rental equivalent value…

Irvine Housing Market Prediction Chart

74 thoughts on “Price-to-Rental Ratio

  1. Dude

    IR–the very first word of your post is misspelled. Fortunately today you didn’t post a listing where you made fun of all the realtor’s mistakes. That would have been embarrassing.

    By the way, thanks for such a consistently great blog. Discovering IHB,, and piggington were what prevented me from making one of the worst mistakes of my life when I was looking at buying a place last winter.

  2. irvine123

    “It is clear from the graph above that prices were too high back in 2000”

    If I just look at your chart, 2000 was just picking up after many years of flat line. How did you conclude in 2000 was too high?

  3. Diana K

    bc the 2000 price is roughly equal to the 80’s-90’s bubble. click on the graph & it will come up on its own & be easier to see.

  4. lawyerliz

    I can’t deduce any kind of overall trend line by looking at the years posted. Usually you can eyeball a graph, put a ruler over it and come up with a line thru the middles averaging out the outliers. I see no trendline at all, up or down, except a series of booms and busts. In fact
    the closest thing to a trend line is something pretty much due east-west on the chart, because the boom at the end clearly is the chart equivalent of a singularity, ie, not something the chart can really handle.

  5. No_Such_Reality

    IR, how does the OFHEO price to rent ratio look for SoCal over the last three cycles? I take it the one highlighted is national.

  6. dataguy

    since we are dealing with an affordability ratio….the trend line should be flat….

    ofcourse this will never happen in the real world….. so it should oscillate (at some standard deviation) above and below the flat line in cycles….

    it does that up until 2000

    it appears the flat line should be drawn somewhere around a 2.2 ratio

    that’s a heck of a long way to go

  7. lawyerliz

    Daniel Gross of Money Talks on Slate cites IHB for realator critiques and the bad pictures that they take.

    Congrats IR.

  8. IrvineRenter

    “On” instead of “one.” Those are the most difficult kinds of misspellings to find because they aren’t technically misspelled. “On” is still a word, it just isn’t the word I wanted to use. Funny how my mind still read it correctly even when it was wrong.

  9. IrvineRenter

    The “flat line” is where the relationship between price and rent is supposed to be flat all the time. In fact, if you were to create a graph like this for a non-bubble market like Milwaukee, Wisconsin, you would see a flat line for the entire series of the graph.

    Don’t confuse the flat line of the price-to-rental ratio for a lack of appreciation. House prices still go up in markets like Milwaukee, it just does it at a rate consistent with the growth in income and rising rents in the area. Houses prices in bubble markets like ours detach from this line periodically but always return to it over time.

    Ask some people who were shopping for houses in 2000, and most will tell you the conventional wisdom was that prices were too high. They were. Prices had already detached from the historic price-to-rent ratio and began to bubble. Nobody at the time thought prices would rise further and become the mega bubble we witnessed over the last 7 years.

  10. dataguy

    Irvine Renter,

    Let me preface this by saying I am a long time reader. Thanks for your excellent analysis……

    Please let me provide some constructive criticism to your Median Home Price vs. Rental Value chart.

    1. I believe you underestimate the current rent for the Irvine OC Median…. in looking at homes and rental properties I would call it closer to $2500.

    2. By my calculations I believe your 160 price to rent ratio assumes 100% financing. Considering the credit crunch I think you need to assume an LTV of 80%. If you look at long term appreciation of Southern California real estate… appreciation is comparable to what you would get in a money market account…. so I think long term appreciation cancels out the interest you would get on the 20% in a money market. With this assumption the price to rent ratio should be closer to 190.

    These 2 points would have a significant impact on your trough.

    Because of these 2 points I would move the trough as follows:

    Baseline: $2500 * 190 = $475,000

    yearly rental appreciation = 3%

    2009 Median ~ = $475,000 * 1.03^2 = $504,000

    That would put the trough on your graph somewhere around 3Q2009.

    I’m not saying that I am right…. hopefully people won’t call me a bull by writing this.

  11. Law_Student

    IR – I like your analysis and agree with the basic assumptions.

    However, I believe the lines will meet sooner than is indicated in your charts. Prices should fall faster and rents are rising faster.

    Prices will likely overshoot the bottom, making for some higher risk, higher return opportunities in 2009.

    Being more risk averse, I am not buying another home until late 2010.

    If average price is still $430k in 2013, I will be very surprised. I say at least $600k.

    Hope your site is still here in 2013.

  12. weichi

    How does this change when you take interest rates into account?

    $1000 monthly payment at 6% is a 167k loan. At 7% that’s a 151k loan. (30 year fixed) So the 1% increase in interest rates will have a similar impact as ~10% increase in price to your ability to buy a home (at least for 1st-time home buyers).

    Seems like this affect would make the late-70’s/early-80s bump look much bigger – weren’t interest rates over 10% during at least part of that time?

  13. Mr Vincent

    ” prices will fall back to the historical relationship between prices and rents”

    That is correct, although I will speculate that there will be other forces that will keep the lid on real estate in the future.

    I am referring to demographics. The U.S. and most of the rest of the world is getting older. Of course this is due to the baby boom which occurred after World War 2 – 1946 to 1964.

    As the boomers get older, they will have to shed hard assets in order to provide liquidity in their retirement. Many boomers will sell their second and third homes initially. Then, its only a matter of time before they sell their primary and make an attempt to downsize.

    The reason I believe this will happen is because I have already done this myself. I always try to think about what my generation will do in the future, and then I act on that myself.

    Believe me when I tell you that you have to make an assumption when you own a home. You have to assume that your home is a money pit. You just have to accept that.

    Many boomers will not be able to retire until they can afford to. Selling the house and moving to smaller digs will help set them up in a situation where they can retire and prepare their return to “flower children” nirvana.

    For Boomers , it will all be about the “experience”, and as opposed to LSD, it will be about going back to Disneyland/Disneyworld and/or taking a world cruise. The place they live in, or its size will not matter. They will want to free their minds by travel.

    I know some of these things I am saying in regards to what us “flower children” will want in the future may seem odd or hard to understand for the gen-x or gen-y readers, and I would not understand it myself if I was younger.

    The important thing to remember here is that there is no future in housing as an invesment. It will return to being just a place to live and/or raise a family. The boomers will find something else to create a bubble in.

    I would continue to wait before purchasing a home. They are STILL TOO DAMN EXPENSIVE, even at this time.

  14. IrvineRenter


    You can be bullish if you want. We don’t get to many bulls here mostly because they can’t argue the data right now which is decidedly bearish.

    Your item #1 is may or may not be correct. If you look at the median income in Irvine, $85K, the median property rent should be around $2,000. I was stretching it by a little over 10% to call it $2,250. You are really stretching it to call it $2,500. Keep in mind that most of Irvine is smaller, attached product. When you see a small house renting for $2,500, you are looking at an above median property in Irvine. It probably would be median in most other communities, but based on our product mix here, detached is above median.

    “If you look at long term appreciation of Southern California real estate… appreciation is comparable to what you would get in a money market account” If you are looking for a justification for ignoring 20% of the purchase price, you can certainly do this, I just don’t think this makes much sense. When you pull the money out of a money market account and put it into a home, the interest is lost. You hope you will get it back through appreciation, but this not as safe a bet as leaving it in the bank.

    You are correct that if you assume a rent that is 10% higher and assume a payment that is 20% lower, the baseline will be higher. The market did not bottom at this level in the mid 90s, and I think it is likely we will get significantly more overshoot as this bubble collapses. I think we will see many distressed properties converted to rentals selling in the market at 100-120 GRMs at the bottom.

  15. IrvineRenter

    “If average price is still $430k in 2013, I will be very surprised.”

    Call is residual kool-aid intoxication. I will not be surprised at all, in fact, I would not be surprised if it is lower.

    Think back to March 2000 when the Nasdaq was at 5,200. Who would have guessed it would bottom out at 1,200 in March 2003?

  16. dataguy

    a few comments……

    1. comparing the median rental to the median house is not comparing apples to apples…. you need to look at what the median house goes for in the rental market……. $2500 seems to be about right….. but that’s debatable and not very scientific, just from my personal experience

    2. long term appreciation on RE in SoCal is about 5%…… I think you discount the fact that you also gain on the leverage portion of the house……. I agree with you that there are no guarantees… I’m just pointing out long term average appreciation on RE…. this is much less than the average return on equities; I would argue RE is less risky than equities…. but that is debatable

    3. let’s hope money markets are a safer appreciation bet ….. based on the condition of financial institutions….. this may or may not be a good assumption

  17. dataguy

    “I think we will see many distressed properties converted to rentals selling in the market at 100-120 GRMs at the bottom.”

    I agree with this….. run down condos will be worth dirt at the bottom.

    I also agree with your analysis overall as a viable scenario; I just wanted to point out how I see the current state of rent vs. buy; and how it plays out going forward to form a trough.

  18. flyovercountry


    2 issues with your numbers regarding the 20% downpayment vs the leverage of 100% down. As an alternative to a down payment, most people wouldn’t put all of the 20% in a money market fund, even a conservative saver would use CDs, much less mutual funds. So the opportunity cost of the 20% downpayment is higher than you are figuring.

    And the second issue is in assuming that there will be any appreciation in the home for the next few years. Even with your more optimistic numbers, the value of a home is still almost 2 years away from bottoming out, so sticking the downpayment money under a mattress would still be a better investment over the next 18-24 months.

    Since lenders are pretty much going to have to require 10 and 20% downpayments, a model based on those downpayments would be more accurate, true. But since the opportunity cost of the downpayment is greater than the savings from the downpayment over the next few years, factoring in a downpayment would actually be more pessimistic than IR’s numbers.

    In one of IR’s previous notes, he explained the rational of his 100% down assumption.

  19. IrvineRenter

    “comparing the median rental to the median house is not comparing apples to apples”

    It should be. In most real estate markets, it is. It isn’t here because we have a very large number of apartment complexes and a higher than national average population of renters.

    “$2500 seems to be about right….. but that’s debatable and not very scientific, just from my personal experience”

    That is why I was pointing out that most of Irvine is attached. I think your perception of what constitutes a median property is actually above median.

    “I would argue RE is less risky than equities…. but that is debatable”

    If it is not leveraged, RE is less risky than equities because it is generally less volatile, but since you can leverage real estate to 100% (when lenders are stupid), real estate becomes much, much more risky than nearly any other asset class. Trading futures has less risk than real estate given the leverage real estate has. At least if you blow out your futures account, they will close it when you go negative. There is nothing stopping negative equity from getting worse and worse in residential housing.

  20. dataguy

    I’m sorry but putting 20% down so you don’t have to pay 6% interest is the same thing as putting 20% into a 6% investment.

    additionally both have tax ramifications that more or less balance out

    I do agree with your comment on liquidity…. there is definitely value to the fact that the CD is liquid while the RE is most certainly not.

  21. dataguy

    re: rental property median vs. median house/condo price

    as you point out rental median is based on a lot of 1 br and 2 br apartments….. the median house price (including 1 br and 2 br condos) includes a great portion of larger properties both in terms of sq. ft., rooms, bathrooms, garages, etc.

    I am basing the $2500 rent on what a $600K home in Irvine goes for in the rental market; is my estimate crazy?

  22. mark

    “If you look at the median income in Irvine, $85K…”

    Since small changes in inputs greatly magnify differences in forecasts, I think it’s fair to consider the possibility that the Irvine median of $85K is a little low. If you use the OC Register’s data ( and assume 3% annual income appreciation since the 2004 baseline, you’ll get a 2007 Irvine median 15% greater than the routinely used $85K:

    2004 $89,538.88
    2005 $92,225.05
    2006 $94,991.80
    2007 $97,841.55
    2008 $100,776.80

    Using these figures raises the troughs significantly.

  23. mark

    “Being more risk averse, I am not buying another home until late 2010.”

    I don’t understand how you can make this absolute statement. So, if that million dollar home in 2006 is selling for $400K in 2008, you’re saying, “Nope, I’m not going to buy until 2010”?

  24. IrvineRenter

    As you noted, the actual median rent in Irvine is below the $1,947 the median income would justify because of the 1 and 2 bedroom apartments.

    I don’t think your estimate of $2,500 for a 600K home is far off. I am suggesting that a 600K home is not a median rental. The median is the point where half the data points are above and half are below. I am just pointing out that well over half of Irvine’s housing stock is made of of smaller attached products. Woodbridge for instance is 75% attached and 25% detached, and the Irvine Company has been putting a high percentage attached in its new communities to maximize their densities.

    Your number may be correct. I have written about this in more detail in these posts.

  25. IrvineRenter

    Irvine 92602 $87,419.15
    Irvine 92603 $151,785.96
    Irvine 92604 $66,351.80
    Irvine 92606 $70,412.68
    Irvine 92612 $73,395.73
    Irvine 92614 $78,436.10
    Irvine 92618 $106,313.36
    Irvine 92620 $82,196.28

    Which number is correct?

    Estimate — Percentage — Cummulative

    Total: 63,646
    Less than $10,000 ——– 4,633 — 7.3% — 7.3%
    $10,000 to $14,999 —— 2,015 — 3.2% — 10.4%
    $15,000 to $19,999 —— 1,159 — 1.8% — 12.3%
    $20,000 to $24,999 —— 1,973 — 3.1% — 15.4%
    $25,000 to $29,999 —— 1,233 — 1.9% — 17.3%
    $30,000 to $34,999 —— 1,069 — 1.7% — 19.0%
    $35,000 to $39,999 —— 2,021 — 3.2% — 22.2%
    $40,000 to $44,999 —— 2,071 — 3.3% — 25.4%
    $45,000 to $49,999 —— 2,353 — 3.7% — 29.1%
    $50,000 to $59,999 —— 3,108 — 4.9% — 34.0%
    $60,000 to $74,999 —— 6,169 — 9.7% — 43.7%
    $75,000 to $99,999 —— 8,666 — 13.6% — 57.3%
    $100,000 to $124,999 — 7,924 — 12.5% — 69.8%
    $125,000 to $149,999 — 5,279 — 8.3% — 78.0%
    $150,000 to $199,999 — 6,495 — 10.2% — 88.3%
    $200,000 or more ——– 7,478 — 11.7% — 100.0%

    Irvine’s median income is approximately $85,000:

  26. IrvineRenter

    It does have the potential to bias the numbers. For instance, if 4 of the 8 zip codes have small populations of high wage earners, a simple average would make the numbers too high.

  27. IrvineRenter

    “I’m sorry but putting 20% down so you don’t have to pay 6% interest is the same thing as putting 20% into a 6% investment.”

    I think you are forgetting the multiplying impact of leverage. You could make much, much more than 6% if houses appreciate, and you could lose much, much more than 6% if they do not.

  28. Diana K

    “I’m sorry but putting 20% down so you don’t have to pay 6% interest is the same thing as putting 20% into a 6% investment.”

    No, it’s not.

    Putting less than 20% down does not increase your interest rate charged by the bank by 6%.

    It’s not like you’ll get a 6% interest rate if you put 20% down, & a 12% interest rate if you don’t.

  29. Diana K

    “I am basing the $2500 rent on what a $600K home in Irvine goes for in the rental market; is my estimate crazy?”

    so, you’re using the $2500 rental rate on a $600K home to justify that the $600K home price is right to then justify that the $2500 rental rate is right.

    not crazy, just circular.

  30. Diana K


    do you know what the percentage of real estate agents/brokers/etc.. were part of those annual increases in income?

  31. dataguy


    You can complain about rent all you want…. it is what it is…

    I’m making the point that $2500 X 190 = $475K

    so… that $600K home should be $475K today…. then I’m applying inflation to find a trough

  32. Chris

    I have one concern about the last chart. It shows rents increasing at the rate of inflation. However, haven’t rents been declining in real terms for several years?

    If we are assuming that the home-price-to-rent ratio will revert to mean (which I think is valid) then I think we should also assume that the rent-to-income ratio will revert to mean. I suspect (though I am not sure) that because rents have not been keeping pace with inflation in recent years, they will need to increase at a rate greater than inflation to revert to mean.

    The reversion to mean thing is a little theoretical, but I also think larger rent increases make practical sense. Renting was ‘out of favor’ during the bubble, driving prices down. As it comes back into favor, more people will rent, driving demand and prices up.

    Anyway, I think it would be better if the rent line in your chart increased at a rate above inflation for a few years.

  33. dataguy

    Irvine Renter,

    I think your analysis is awesome and I really like this site.

    Debating baseline numbers is fun. I could be right….. you could be right… or it could be somewhere in between.

    I get paid to develop analysis like this (much like I think you do).

    My main beef with your analysis is that you assume 0% appreciation on RE. I happen to think RE is a pretty awful investment…. however assuming 0% appreciation in SoCal is flawed. 5% is probably realistic…… maybe calling it 2-3% based on liquidity limitations is better; You take midpoints in much of your other analysis, yet you don’t with appreciation.

    My other beef is that a $418K bottom could be correct….. but it’s easy for it to higher than that by as much as 20%. Someone could sit and wait for the $418K bottom forever; speculating the bottom is just like speculating the top.


    Diana, you may need a finance 101 class.

  34. Jack

    I’m enjoying watching all the homedebtors come here and spout wishful excuses to deny what these charts are clearly showing them.

    “Rents have been decreasing!”

    “2000 wasn’t too high!”

    “People are willing to pay a premium to own in OC!”

    “People in OC make lots of money and can afford to pay high prices!”

    Face it. Your homes are overvalued and are going to drop significantly in value. And it’s going to take several years for the pain to subside.

  35. mark

    If you take the two (of eight) middle figures, the median would be somewhere between $78,436 – $82,196, so $80,316 in 2004 as a starting point? Assuming 3% wage inflation:

    2004 $80,316
    2005 $82,725
    2006 $85,207
    2007 $87,763
    2008 $90,396

    That get’s us closer to the $85K frequently used, but still slightly higher.

    Does anyone here know any 2-income earning couples living in Irvine grossing less than $85K? Not at all trying to sound snooty, but it just seems like most couples beyond their mid-20s living in Irvine earn more than $85K.

  36. mark

    “My other beef is that a $418K bottom could be correct….. but it’s easy for it to higher than that by as much as 20%. Someone could sit and wait for the $418K bottom forever; speculating the bottom is just like speculating the top.”

    It sure is fun when you find another commenter thinking exactly the same way. However, IR has never been preachy. He hasn’t made any ridiculous comments suggesting you should only purchase at the absolute bottom. IR’s simply providing great analysis and opinion.

    That’s one reason why I always comment that you should definitely control what you can and not worry too much about what you can’t; e.g. regardless of where the value is in any real estate market, only finance a home less than 2.5 times your income and ensure your total housing cost doesn’t exceed 28% of your gross. Renting is great for a lot of reasons, and it’s a must if you can’t meet these thresholds.

  37. mark

    I was trying to stay reasonable, but okay; let’s say that million dollar home in 2006 sells for $100K in 2008, are you going to wait til 2010 now, ’cause that’s he said.

    I’m simply pointing out how ridiculous I think the statement is.

  38. mark

    I see your point Diana K, but I have no idea what the percentage is. I personally knew several people earning 80th+ percentile incomes during the boom as realtors/brokers. Now, not so much…

  39. mark

    I don’t see a single comment here spouting wishful excuses. Do you dislike discussions about the validity of data? Small differences in assumptions and data make huge differences in projections covering years.

  40. dataguy

    Mark I’m not sure Jack read any comments above.

    I only see bears on this board.

    His first 2 statements are clearly bearish statements…….. the home debtor prays rents will not decrease otherwise they are even more screwed.

    The third and fourth statements… most rational bears and bulls alike would agree with to a certain degree.

  41. Jack

    Read between the lines. Those quotes I posted are paraphrases of some of the comments above.

    It really doesn’t matter if Irvine’s median income is 85K or 95K; the fundamental point is that housing values are hyper-inflated in OC, and they’re going to come down. A lot. Even with a little more income, people simply can’t afford to buy what’s on the market, especially now that the bank-assisted Ponzi scheme of the last several years has finally exhausted itself.

    I suppose it’s natural that someone who bought a home in the past couple years (or even someone who’s watched her home value skyrocket) would be experiencing a little cognitive dissonance right about now. When the facts get in the way of your desires and dreams, it’s often comforting to nitpick or ignore the facts.

  42. former_irvine_resident

    “He hasn’t made any ridiculous comments suggesting you should only purchase at the absolute bottom. IR’s simply providing great analysis and opinion.”

    Actually, IR has suggested that buying right before the bottom is a good idea. If I recall correctly, his reasoning is that you will have better selection and more flexible sellers at this point. Once the bottom is realized then supply will drop and sellers will become less flexible seeing the rebound in progress.

  43. mark

    Home values will come down “a lot,” so we agree. What we’re trying to project as accurately as possible, is how much “a lot” is. And whether the real median income is $85K or $95K makes an exponential difference in where the median price of an Irvine home will rest.

  44. Jack

    By the way, I have no problem with people coming here and discussing the “validity of the data”. I’m just more than a little suspicious that the people questioning or nitpicking the data have an emotional attachment to the idea that their home values are unlikely to go down that much.

    Here’s what I imagine the guy asking about rents decreasing was thinking: “Maybe these charts aren’t accurate, and maybe my home isn’t losing that much value, because after all, rents have been dropping!” Denial.

    Here’s what I imagine the person asking about 2000 price-to-rent levels was thinking: “Oh my god, if price-to-rent values fall to the 2000 level, I’m gonna be upside down on my mortgage for years!” Shock.

    Here’s what I imagine the folks nitpicking median Irvine incomes are thinking: “Gee, people in Irvine are well-off. They can afford to buy expensive houses and keep the local real estate market inflated. Maybe my house won’t lose that much value.” Denial.

    Granted, it’s all speculation on my part. But I’m sure there are real people thinking (or afraid to think) precisely these things. It’s easier to be in denial than to accept that you might be losing money. People don’t like to be told their baby is ugly.

  45. IrvineRenter

    “just because credit contractions have made such noise in a variety of markets lately doesn’t mean that real estate won’t continue to attract a premium as an asset”

    During the bubble, the premium for real estate was created simply because real estate was going up in price — irrational exuberance. Once real estate stops going up in price, the investment premium disappears, and all you are left with as investment reasons for ownership is an inflation hedge and savings over rent. This is why I contend that prices will decline until people have a good reason to buy again which is to save money over renting.

    Actually, I agree with your sentiments about inflation. I think Bernanke is letting the genie out of the bottle. However, it will take a lot of inflation to justify current house prices, and that inflation must show up in wages and rents rather than just commodities and imports. What I am afraid we will see is price inflation in the absence of wage inflation due to the declining value of the dollar. Without wage inflation, people will not be able to bid up the values of real estate, unless of course the lenders lose their minds again and start giving away money.

  46. dataguy

    Jack I have never purchased a home in my life.

    I am completely bearish on OC real estate.

    I would argue that some of the bears here (you included?) have an overdose of Schadenfreude.

    Don’t let Schadenfreude cloud your judgment.

    Home prices will certainly come down… the debate here is on some key assumptions with the analysis in predicting the bottom;
    It only takes slight changes to have a major impact on where the bottom is.

    Moreover predicting the timing on that bottom is next to impossible.

    I would argue that Irvine Renter should only draw the trend lines of current base points (160 – 190 multipliers) with various rent assumptions…… the bottom will interesect one of those trend lines….. predicting the time is an assignment in make believe as their are way too many geo-political factors: inflation, recessions (or lack their of), dems vs. rep, bail outs, etc etc

  47. Diana K


    I don’t care how much your rent is in irvine.

    I’m just pointing out that your “logic” depends upon a circular argument. It doesn’t make sense.

  48. Diana K

    data guy,

    you may get paid to analyze data, but you certainly don’t know anything about logic or mortgage rates.

  49. Diana K

    as an absolute, yes.

    but, when you do believe that the bottom won’t occur until 2010 or later as the op said “making for some higher risk, higher return opportunities in 2009.”

    obviously, op believes that purchasing in 2009 will still be a risk.

    so what he said was that he would not be willing to purchase until he was very certain that the asset wouldn’t continue to deflate precipitously, I thought so, anyway.

  50. FairEconomist

    Prices were higher – but interest rates were lower, which means prices *should* have been higher at the same stage of the cycle. I haven’t done the numbers to balance it out but equivalency means 2000 was not as bad as the 1990-ish bubble.

  51. Stupid

    You’re all assuming the median income stays constant.
    That seems unlikely due to:
    1. Loss of high paying RE related jobs
    2. If there’s a recession, raises, bonus, etc. are going to stink. If you get to keep your job.

  52. dataguy

    If you know what hits the fan, and the job market goes completely south (more so than just RE jobs) then the OC is in for worse than Irvine Renters analysis…

    one caveat:

    1970s style inflation….. rate cuts combined with stagnant mortgage rates could bring us there easy

    if we have that the bottom could be much flatter even with a coupled recession.

  53. mark

    Yes, there are a lot of assumptions in these charts; the median income is just one of ’em. When you’re projecting you must make assumptions.

  54. dataguy

    Mark, I think making these assumptions and doing this analysis is fun. I also think Irvine Renter has done a great job of it.

    People with less skills than Irvine Renter should just understand that very slight alterations of assumptions can have a drastic effect on the calculated bottom.

    This does not matter for most. If you can’t afford $2500 in rent. You won’t be able to ever afford a SFR.

  55. dataguy

    there is no circular argument.
    there are plenty of $600K properties renting around $2500K
    if you think it’s a circular argument then you don’t understand Irvine Renters analysis.

  56. Kenny Alex

    it’s very useful and interesting for me , i’m a newcomer in real estate field. hope that we can connect each other to have a really clear and general image about real estate market.
    thank for your sharing !!!!”_”

  57. AZDavidPhx

    The problem is that your rent prices are inflated because of your inflated house prices.

    As your house prices have bubbled, a lot more people have opted to rent than buy. This has created a higher demand for rent which has increased your rent costs.

    So when you use a bubbled rent price to determine what is a fair home price, it doesn’t mean a whole lot.

    As house prices come down and more distressed properties go to plan B (“I’ll just rent it out”) – the supply of rents will increase and as more people move to buy houses (at lower prices) your rent prices will actually decrease.

    That’s the problem I have when I see people on this board trying to use the “rent argument” to justify inflated house prices.

  58. dataguy


    I have seen rents decrease before after the tech boom in SF.
    This was due to a mass exodus of renters.

    The problem in the OC is that most people who were in the mortgage RE / business and lost their jobs drank the kool aid and bought homes….. now there are a bunch of empty houses owned by banks.

    This would impact the rental market if home sales were not so anemic.

    I speculate that rent will increase at a mild rate (~3%) for the next couple years and then probably stay stagnant for a couple of years. There is a large lag between when these empty houses impact the rental market.

    The one area where the housing decline is impacting the rental market immediately is in the $2500 – $5000 + house rental market…. check craigslist…. tons of these.

    Here is the caveat:

    Commercial space is going to be cheap (lot of empty space currently)…. housing is getting cheaper…. this will make the OC attractive for companies. Population might stay stagnant in the OC because of this.

  59. No_Such_Reality

    “I speculate that rent will increase at a mild rate (~3%) for the next couple years and then probably stay stagnant for a couple of years. There is a large lag between when these empty houses impact the rental market.”

    Doubtful, OC will follow San Diego. San Diego already turned the rent corner they’re down 5% year over year. When you look through Craigslist and other rental groups carefully, you’ll notice the number of rentals in lower dollar figures is increasing. It’s easy to miss because the number of high dollar rentals (wishing price rentals hoping to cover the mortgage) have also spiked.

  60. Diana K

    “there are plenty of $600K properties renting around $2500K”

    oh, that makes a ton of sense.

    so, if there were plenty of $2 mil properties renting around $5000, then by your logic the median rental would be $5000.

    makes a ton of sense.

  61. No_Such_Reality

    “I’m making the point that $2500 X 190 = $475K

    so… that $600K home should be $475K today…. then I’m applying inflation to find a trough”

    To investor that math works out as $2500 x 100 = $250,000.

    Yes, 100 is an annual GRM multiplier of 8. For places with HOAs and other PIAs, the low end of the multiplier applies. A better way of looking at it is what is the cap rate they’ll see.

  62. Diana K

    then you really need to consult with your 4 yr old, since he/she seems to be able to understand that not putting 20% down does NOT increase your mortgage rate by 6%, & yet, you, sadly, very sadly, cannot.

  63. ochomehunter


    In all this analysis I suppose you do not take into account “Recession” that we are running into. I say by the end of 2008 and mid 2009 we will be in one where people will lose jobs and lose homes eventually, jobs will be hard to come by and incomes will fall. So, if that happens, how do you predict the fall? One has to have a job in order to buy home.

  64. Alan

    There may be a lot of places asking over 2K/month rent but talking to my agents, I learned that the market for tennants really thins out once rent passes 2K/month, so blithly assuming that average rents of 2.5K or more/month may not represent the average renter.

  65. zoiks

    Rents in OC went down in the early 90s. I wouldn’t be surprised if they start going down again. I see a heck of a lot of for-rent signs around lately. Personally, I’m convinced a lot of illegals have been leaving, going to other states (or perhaps back south of the border). Partly because a great many of the for-rent signs I see in my neck of the woods (CM) are in places where Mexican families have been renting.

  66. rkp

    Jack – how the heck do you read so deep into everyone’s comments? I honestly think majority of people on this board realize housing prices have to come down and are trying to figure out how low they will go.

    I am one of the ones disagreeing with the income numbers but I am absolutely bearish on RE. I need to do a bit more research on the median income numbers but something doesn’t sit right with me. I know I have a limited view but almost all my friends and co-workers make well over the Irvine median and a lot of them are married with both people working. Hence, their household incomes are in excess of $190K. Obviously, I do not interact with everyone in Irvine but knowing that people in their late 20’s and early 30’s are making this much does give me concern regarding the bottom of the market. Also, my wife used to work a major online job site (there are only 2 so wont be hard to guess which one) and she used to see firsthand what kind of companies were hiring in OC and how much they were offering to pay for various jobs and most of the jobs were offering close to 6 figures or more. Again, this is just a very limited view of the overall job market but I really want us all to evaluate the real median income so that we can make accurate predictions on RE.

    And before you go on assuming again, I never have owned a house and have been patiently renting and saving my money to jump in and buy when the time is right.

  67. michael

    IR –

    I think you do a great job – maybe five years from now my wife and I can buy you and whoever you bring dinner.

    When you said “I think we will see many distressed properties converted to rentals selling in the market at 100-120 GRMs at the bottom.” I might add one thought.

    My guess is that would also be the bottom but I may remove the word “distressed”.

    One a “distressed” property’s rent should be less so the fact it is distressed is not relevant. My greater point is reversion to the mean (RTM) brings us down to about an historic 150 GRM. I believe RTM will happen but that will negate all the demand factors that created the bubble (credit, psychology) but it will not reflect the excess supply.

    The excess supply in my opinion brings us to 100 – 120 GRM.

    Great job Charlie Brown.


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