Posted Wednesday, May 05 2010
There has been a lot of really good affordability analysis and commentary around the blogosphere lately, but one of the things you'll notice is that different organizations don't always come up with the same numbers for price-to-rent and price-to-income ratios. To a degree that's understandable since getting good data on actual home prices is hard, but it turns out that rents aren't that simple either.
Leonhardt's piece doesn't lay out exactly how Moody's calculates the rent ratio, but Richard Florida's piece does. It looks like he's taking median sales prices from the NAR and dividing that number by the median contract rent from the American Community Survey. Using the NAR median sales price number is probably the best you can do as far as getting relatively timely pricing data that's not just an index. Similarly, the Census' median contract rent is your best bet when it comes to uniform national and local rent statistics. I think what's missing is an accounting for quality when approximating the rent of an equivalent owned home.
The 2008 Census ACS housing data shows that the average size of a home owning household is 2.7 members but the average size of a renting household is only 2.44 members. In order to try to create a more comparable price-to-rent ratio, I suggest adjusting median contract rent by the ratio of average owner household size to average renter household size. It's kind of like using household size as a proxy for square footage; It's not perfect, but it's likely a good first order approximation. In this case the adjustment inflates the 2008 median contract rent of $687 by 10.65% (2.7/2.44) to $760. Not a huge adjustment, but it probably gets you closer to a owners' equivalent rent type measure than the median contract rent value alone does.
I've computed the median sales price-to-rent ratio at the national level using NAR's latest sales report and found the unadjusted price-to-rent ratio to be 20.97. When you adjust the rent using the household size the price-to-rent ratio falls by just over two points to 18.95. Again, not a huge drop but with numerous articles referencing a rent ratio of 20 as an affordability cut off, it seems like it should be noted.
This trend of larger households among owners holds across the country, so I expect that most if not all price-to-rent ratios are being over estimated if they use an unmodified median contract rent as Florida's work does. And of course that's the analysis that would be most interesting — a full calculation of all metro area median sales price-to-rent ratios using household size adjusted rent values. It's already in place for the national housing affordability data I track, but I should have it at a metro level by next week so we can do a direct comparison with Richard Florida's numbers.