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Standing on the edge of the Pacific last week, overlooking gorgeous cliff bluffs protruding into the ocean, I found myself discussing a subject I vowed to leave in DC during my vacation: The high cost of living in Washington.
Specifically, I was referring to rental costs. Sure, it could be worse. I’ve never had to erect a cardboard wall to “create” another “private” room, like some people do in New York City. And San Fran, where I was last week, isn’t known for its cheap living. But rents in DC seem ridiculously high—-without the ocean breeze, humidity-free air, and citywide vistas—-and seem to only be getting worse. (See this recent post I did on group house rents.)
But a recent report by the Center for Economic Policy Research and the National Low Income Housing Coalition provides an odd reality check: Home prices in the DC-Area are still dramatically inflated compared to rental prices. (Hat tip to Urban Turf for spotting the report first.)
Over the past 15 years or so, “home prices shot up while rents continued to move in line with inflation.” The report compares rental prices to home sales prices by looking at this ratio:
Where the ratio of median sales price to median annual rent had hovered close to 15 to 1 in recent decades (i.e. it took $150,000 to buy a house that would rent for roughly $10,000 per year) at the peak of the bubble in 2007, it went above 25 to 1 in many inflated markets.
For purposes of analysis, this paper treats a home price that is 15 times the annual rent of a comparable home for rent as being at an equilibrium sale price,3 and defines a bubble market as one in which the ratio of price to annual rent exceeds 18 to 1.
In our area, in April 2008, the price-to-rent ratio was 20.8. By this past April, the price-to-rent ratio was 21.5.
A lot of other cities are still looking at bubble-like ratios. But some cities’ ratios are going down, unlike ours. Los Angeles, for example, went from 28.1 to 21.5 from April 2008 to April 2009.
“>Image by umjanedoan, Flickr Creative Commons