Price-rent ratio is one good way to gauge whether a particular housing market's values are stable or not. The popular ratio is figured by dividing a city's median home price by its median annual rent. A pretty basic calculation that will actually say a lot. The national historical average has been 15, according to Marcus & Millichap, a California commercial real estate brokerage. That's where it again stood at the end of the third quarter of 2009, having retreated there from almost 21 where it had soared to during the housing bubble's climax in 2005.
By many real estate yardsticks, a price-rent ratio under 15 translates into a market where home values are considered quite stable. On the other hand, anything over it, and especially higher than 18, signals that prices remain soft and are likely to erode further. Unless a large down payment is used, going underwater - mortgage balance is higher than property value - in the coming months becomes a real danger.
Southern Nevada - featuring communities like Summerlin, Anthem, Mountains Edge, Canyon Gate, Spanish Trail and North Las Vegas - housing values have for the most part taken a brutal beating during the notorious downturn. It has thrown scores of Las Vegas mortgage borrowers into the underwater pool that has left them trapped in their homes, a development that will negatively affect future housing demand here. It has helped, though, move the price-rent ratio to the stable range, settling in the third quarter of 2009 at 15. The chances therefore are slim that values will drop any further, and if they do, it ought to be minor and subdivision-specific. The sources for this computation were Marcus & Millichap Research Services, Federal Housing Finance Board, NAR and Reis Inc.
Las Vegas sporting 15 as its score places it high in still another desirable national real estate ranking. It has for months "dominated" bad-boy lists that have measured such dynamics as mortgage foreclosure rates, price declines and underwater homeowner ratios. Finally there is something to cheer about. This time Sin City was tied for sixth place in the "most stable" category. The top spot went to Cleveland with a score of 12.
This is particularly useful information for renters who are thinking about buying a home using today's affordable mortgage money. They have understandably had concerns about possible further price erosion in Las Vegas valley and have as a result put off purchasing real estate now. This metric should give them something concrete and positive to rely on. Since prices tend to vary quite a bit between subdivisions, it's also advisable to do a thorough market analysis, preferably through a real estate professional, to ascertain which neighborhoods are the steadier ones before signing on the dotted line.
Photo by mandj98
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