Standard & Poor's: Implications of the Rent to Price Index in Housing Markets

Interesting paper; however, I would inferring from it anything about what will happen in Manhattan. The indices it uses to do its analysis cover a broader area than Manhattan (namely, Case-Shiller and BLS data) and so the data are not granular enough to be able to conclude anything about Manhattan.

Broad geographic areas, sure. Macroeconomic effects, sure.

should read "however, I would AVOID inferring..."

Topper - where were these guys 5 years ago when they were rating these mortgages AAA? Who really gives a shit about what S&P thinks. They lost all credibility.

I have heard stories from coworkers that called S&P in the past asking about their assumptions. No joke, they said "Our models can't use a negative value for HPA (house price appreciation)." They didn't even bother adding in that functionality to their models because house prices only go up, as we all know.

Of course, since rents are still declining...

Hey, it's hard to argue that S&P (or Moody's and Fitch) did a good job analyzing complex bonds during the past five years. They did a terrible job with lots of conflicts of interest.

That said, history is history. Doesn't mean that they don't have many bright people working there who do thoughtful work. I think this is a pretty thoughtful piece of work. (Yes, it is a bit academic.)

As has been noted by many folk on this board New York that rent/price ratios (otherwise expressed as price/rent ratios) are very low by historic standards. Hence, the high risk of buying at these levels versus simply renting. This article simply demonstrates that historically such times have, indeed, been risky times to buy. This is the first good "proof" study, though, that I have seen.

Yes, C-S is a "metro" index. But it seems logical that basic relationships seen in metro markets in general would also apply to the Manhattan market.

Are the results surprising? Not particularly. We've seen reams of academic studies on stocks over the years that suggest low earnings yield stock markets (like the late nineties) are particularly risky environments in which to invest. But finally, a good real estate analysis.

Caveat emptor!

Topper: the Manhattan market is affected by things that do not affect the metro New York market. Example: rents are artifically inflated by rent control (constrains supply), etc.

These influences will tend to distort the rent:price relationship, as compared to areas immediately outside the five boroughs.

OK.

But I think low rent/price ratios would still favor renting versus buying. Annecdotally, we all know that "Manhattan" rent/price ratios were very high in the early nineties and it was a great time to buy. (Today, of course, it is the reverse.)

BTW, nice to see that inventories have popped up above 10,000 once again. (Not sure what had been happening over the past few weeks. Kind of quirky.)

I would agree that low rent:price relationships favor renting.

But even here, does it make sense to use an overall measure for all of Manhattan to make a buy/rent decision?

The rent:price ratio in Washington Heights is much less (I assume) than the rent:price ratio on, say, Fifth Ave.

So, I would tend to think that the level of granularity you need for rent:price data is on the level of a building or perhaps block. Maybe ZIP code?

Actually, the S&P case Schiller people are DISTINCT and totally separate from the bond ratings people. And the Case-Schiller people know VERY WELL that house prices have gone down in the past, as they have doing this for years, and have such data on their website, and Mr. Schiller has written books on the topic. Equating this report with bond ratings is like accusing your bank of America teller of personally causing bofa to buy Merrill Lynch for too much, or like blaming your Wachovia broker for Wells Fargo raising your credit card rates.

Think of it as Shiller as the author and S&P as the publisher....

other works by the same pub don't mean a tremendous amount for the accuracy of this author.

sounds alot like what stevehx has been saying for a while

fakeestate - I don't have the data, but why would you think 5th Avenue has (or should have) a different price/rent ration than Washington Heights?

Newbuyer: my assumption is that neighborhoods like Washinton Heights have a larger number of renters than do tony areas like Fifth Ave. Further, many of the co-ops on Fifth Ave either do not allow renters or else have very restrictive limits on the lengths for which people can rent.

This leads me to believe that rent:price ratios vary across Manhattan neighborhoods.

Perhaps I'm wrong.

Yes, neighborhoods do have their own special characteristics. For example, the Bronx does tend to sell at higher rent to price ratios than prime Manhattan.

So do different sectors of the stock market. But we can still make generalizations about whether the overall stock market is rich or cheap based upon earnings to price (earnings yields) levels.

I'd also say that much of Manhattan real estate is relatively "prime" in nature with a few "fringe" exceptions.

Conclusion remains: Manhattan rent to price ratios remain low so this is still not a great time to be buying real estate. Rent for a couple more years.