Rent growth~home price growth

In academics, it’s often taught that home prices should in the long run move in line with rents.  After all (it is argued) home purchase may be viewed as akin to prepaid rent.  Multiple websites (including this CNN Money page) highlight current and historical price/rent ratios.  The popular “rules” that there are levels (of the ratio) that describe better times to rent or buy should have readers consider the notion that rent might have an important role in home prices.

As such, yesterday’s headline (as analyzed here by Axiometrics.com) that growth in year-on-year increases in apartment rentals reached recent highs, should either 1) give a boost to the bulls in this market, 2) reflect a reason that prices have risen so strongly over the last two years, or 3) be deemed irrelevant as the ratio is both too noisy and compares apples and oranges (apartments vs. houses).    (I say “too noisy” on point 3 as price/rent ratios were at all-time highs in 2005, and then proceeded to go relentlessly higher for months after.  I also offer the “bad comparison” language as apartment rents may be concentrated in the more popular urban areas, while home price indices may give a broader weight to less-popular suburban markets.

Those cautions noted, I find option 1 to make the most sense (over the long run) and I would encourage readers to review the Axiometric link (and any other articles on this subject) as my sense is that home prices (in areas covered by these rental increases) are unlikely to be under pressure if rents keep rising.  Home prices often reflect LONG term trends, and the strong rise in rents should lend support to floor levels of implied HPAs in many calendar spread markets.

I’d be happy to take this conversation further with anyone looking to debate, or trade, individual regional calendar spreads.  Feel free to contact me at johnhdolan@homepricefutures.com.