June 20, 2004

Price-Earnings Ratios and Me

Posted by Arcane Gazebo at June 20, 2004 4:35 PM

According to a UCLA economist, Bay Area homes are overvalued:

Leamer calculated the average P/E for homes in several California metro areas by dividing the median price for a single family home by the average annual rent for a 2,000- square-foot apartment in each region. (You can get more and better data for apartments than rental homes, and the two tend to track each other.)

His findings: In the Bay Area, the average P/E for a house shot up to 13. 8 in the first quarter of 2004, compared with 7.2 in 1999 and 2000. Today's ratio is more than a third higher than it was 1989, just before housing prices started a multi-year descent.

My own landlord is attempting to take advantage of this trend by putting the units in my building on the market as condos. Based on his asking price, the P/E ratio for my apartment is 21.3, high even by Bay Area standards*. On the other hand, many of the units have sold already so it can't be as ridiculous as it looks.

The good news in the article is that rents are (still) falling, so when I am forced out of this place in the near future the trend should be in my favor.

(via Matthew Yglesias)

*Assuming this is comparable to the numbers in the article, which in fact does not seem like a strong assumption given my severely limited understanding of economics.

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