Greg Ip
speaker
528 appearances
8 recordings
1 series
first heard Jan 2018
last heard Sep 2024
Greg Ip’s voice in public audio — every appearance, attributed to the second.
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Appearances
That, too, creates demand for houses.
Well, step back for a moment.
Homes are both something you live in, so they're a commodity, but they're also an asset.
They're a form of wealth, and indeed, they're the most important component of wealth for the average American family.
And so if you want to compare them to stocks, well, we know that the things that affect a stock's value are things like interest rates and future profits.
What's the equivalent for a house?
Well, instead of profits, the value of a house is the value of living there.
And the value of living there, even if you live there, you don't collect any money for that.
But you can kind of quantify the value of living there by asking yourself, how much would it cost to rent the same house?
And we have pretty good data on rents.
And what we see is that whereas home prices have gone up 50% since 2019, rents have only gone up by 20% to 30%, depending on the number that you're looking at.
And so it's very hard to explain why home prices should be so high, given that the close alternative, which is to rent a place, hasn't gotten nearly as expensive.
Well, because just as we compare the valuation of stocks by looking at the price to earnings ratio, we can look at the valuation of homes by looking at the home price to rent ratio.
And a variety of models do precisely that.
In the column, I mentioned a model created by the Federal Reserve, which looks at both at home prices and rents, but it also makes an adjustment for interest rates because higher interest rates also tend to make valuations a little bit more difficult because you have alternative ways to invest your money.
When you look at all those factors combined, looking at today's prices vis-a-vis interest rates and rents, you find that the valuations of homes is much higher than historically has been.
In fact, the only time since 1980 valuations have been this high was at the peak of the housing bubble in the mid-2000s.
It depends on why you want to buy a house.
For most of us, buying a house is a place to live.
In fact, in the last three or four years, it's not just a place to live.
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