I guess I don't see so much difference between your two arguments. Both have valid perspectives, are linking very good articles and are quite informative. Disagreement seems to be in the timing and degree of any plateau/drop. Which is exactly where I'm stumped as well.

Interesting thought about the 'buying for rental' aspect. With purchase prices so high and rents so low, how can any of those perennial late night infomercial schemes be above water. And with the leverage involved in those schemes (I watch with purely an academic interest ), it seems like a literal house of cards.

Of course, the line between abject failure and unbridaled success can be difficult to determine at the time when you are actually putting in the money.

Given the low rent to housing price ratios, isn't this proof that we ARE in a housing price bubble? That in of itself shows that housing prices have exceeded the demand for housing. For those areas IMHO....home prices will be the most vulnerable. In other areas where rent still outpaces home prices (i.e. areas where the ratio > 1%), I would not fear a fall as much.

Also, a biggie is property taxes and home insurance which should be added to the home price side of the equation to reflect the true cost of buying, but which cannot always be passed on and asked in the rent price (which is set by the housing supply/demand curve). What drives home prices is its overall investment worthiness as compared to other investments. So it is interesting to compare the two prices and get an overall ratio.

Another factor which skews the rent/housing price ratio is interest rates....the unusually low interest rate enviroment we're in should be perceived as a risk to buying, not incentive (IMO).

A low ratio tells me the demand for housing has dried up while home buying is still in a frenzy. (one or the other or both)

I saw that same kind of slowness in real estate sales in the upstate new york area. I was visiting back there 18 months ago... and was looking at some houses....saw a couple that looked very promising. I told the agent I wasn't interested in buying at that time but was looking more 2 or 3 years out. She replied... "thats OK these houses will probably still be on the market then". That reply stuck in my mind... and started me looking at population growth patterns and job creation stats... which are both negative for that particular area. Another process I'm seeing in that same area is a price Gap in older houses and brand new housing .. same general size bedrooms location etc. It seems that the aging owners are just wanting to move to get out from under the maintenance effort required by an older property. This price Gap / transition to newer housing seems like it would support continued high newer housing prices.. and cause a bump in the availability of low priced rental housing. and not be so much an indication of a price "bubble" but rather an aging population.

unknownshopper said:

<< With all due respect, my guess is that this is a lot easier to pull off with a typical Indiana-sized mortgage than a west cost-size mortgage. >>

Don't be so sure. Incomes and assets are pretty much commensurate with housing prices depending on locale. This is from somebody who has lived, worked and owned property on all three coasts and the midwest.

How in the world have you people gotten stuck on this 1% rent thing? Do you think it really make sense that no matter the interest rate environment, no matter the market for replacement labor and materials that a house should shomehow yield 12%? This is really one of the silliest arguments I've heard to date. Would 15% rent have shown a house to be underpriced in 1982 when the risk free rate of return was pushing that number? Why would I want to own a house that pays me 15% with risk than a bank CD that guarantees that rate? Conversely, why would I buy anything but a rental house when the rate for 'quality' junk bonds is < 10%?

BTW, I guess I should say that you guys are only looking in the major metro areas, and only at single family homes. There are plenty of multifamily opportunities that cash flow loke crazy. I'm working on a 6 unit which should gross $2700 per month in rent. Asking is $170k. I think I can get it for much lower as it's been sitting on the market for over a year. In the same town I saw a 12 unit that grosses $5400 per month. That's got a 360k asking price. Both are within reasonable commuting distance of a diverse number of employers, and both of these are retail offerings.

Has anyone considered that rents might rise to fill the Gap? Really, you guys have got to either get over not identifying the stock market mania or you have to figure out the dynamics of what made it crash. If you figure out what went on in the stock market, you'll soon realize that it's a total JOKE to compare the (so called) 'national' RE market to the stock market mania of the late '90s. The single major thing that killed the stock market was new supply. The brokers rushed down to Kinko's and had new stock certificates printed up 24/7. Let's see you do that with a single family home. It'd be a heckuva trick.

WalStMonkey said:

<< How in the world have you people gotten stuck on this 1% rent thing? Do you think it really make sense that no matter the interest rate environment, no matter the market for replacement labor and materials that a house should shomehow yield 12%? This is really one of the silliest arguments I've heard to date. Would 15% rent have shown a house to be underpriced in 1982 when the risk free rate of return was pushing that number? Why would I want to own a house that pays me 15% with risk than a bank CD that guarantees that rate? Conversely, why would I buy anything but a rental house when the rate for 'quality' junk bonds is < 10%? >>

Why is the '1% rent thing' a flawed measuring stick to gauge whether rental prices are in line with housing prices and when things get too skewed in either direction. The two prices are not driven by the same stimuli so comparing the two in a ratio IMO is a quick easy way to consider different variables in a trend over time or with other properties/areas of the country....that's all. A few months ago BusinessWeek did an article about this subject and suggested using this method (although they compared monthly rent vs. monthly mortgage or something like that) as an indicator for a housing bubble. (We're not looking at return on investment percentages just comparing the divergence in rent vs. home prices. I only mentioned property taxes, insurance, interest rates and you can throw in IRS tax rules, demographics etc. because they are hidden undercurrents.) The bottom line in my mind is how does housing demand as represented by rent prices measure up to housing as an investment. If homes are not a good investment because other investments pay a higher return, then people are going to rent and rent prices will go up, or vice versa. There could be factors that affect both rent and home prices like general inflation of labor and goods prices but even that can sometimes not be reflected in the rent side of the equation. (I know that first hand.)

The rental price and the housing price may be somewhat uncorrelated, IMO. The rental price is really dependent on the supply/demand in the said "rental" market. For example, in my area (Boston), my rental house is mostly for visiting French professionals (Managers/et. al), thus the price is assessed for that category. The rent is always paid by the company. It has almost nothing to do with the real estate seller/buyer market. The house is worth $1.5M, but the rent is only for $4,500/month since that is the upper limit for the company-set allowance for rent. Just my case.

Best wishes.

"We're not looking at return on investment percentages just comparing the divergence in rent vs. home prices. "

The entire argument is flawed, as investments are all relative to one another. If you can't understand why I'd pick a sfh to rent over a junk bond if the yeild on the rental is greater then you don't understand why people pick investments, or how supply and demand is formed. Same thing if you can't understand why I'd pick a bank CD at the same rate of return over a sfh rental. The yield on a single family home is intimately tied to the rest of the investing world.
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The phrase 'artificial demand' while provacative, is meaningless. There is no such thing as 'artificial' demand. The bottom line is you people have decided there is a 'housing bubble' (even though there is no national re market) and are attempting to fit the facts to your conclusions. It's much better analysis to look at the facts and draw the conclusion. There is no housing bubble. Even that term is so broad as to be totally meaningless. This entire thread is a great example of 'Chicken Little' thinking.

The basic characteristics of a bubble is that it can only be recognized and accepted (by everyone) after it burst. Those who see that coming before the party is over are always laughed at - ALWAYS.

Here is what I think FWIW.

Lower interest rates allow

1. People that were borderline to get into the market.
2. Everyone else to afford more house.

Assumptions
1. People still need a place to live and have to buy houses.
2. Everything else is constant (inflation, stock market)

Now interest rates go up:
1. People that were borderline cannot participate anymore
2. Everyone else adjusts the price they shop for down.

Effect:
1. Lower end priced properties go up in value because demand increased
2. Higher end properties go down in value because demand decreased

This means that if 90% of all house prices today are in between $75k - $350k, this range will contract to maybe $100k to $300k. The higher the rate increase, the greater the contraction.