P/E ratio question regarding recent RealtyTimes article

Can someone please confim the data from this article for me. This is the
first time I have seen the P/E ratio defined as the ratio between house
price and household income. Usually I see it expressed as the ratio between
house price and what the house would earn if rented. In other words, the
asset price vs. the potential asset earning, like a stock P/E ratio.
So is this house price to household income ratio worthwhile? Can anyone
confirm that this has historically been an average of 5.2? Because 5.2 seems
like it is high to me. Follow this:
If, historically, households purchase homes that are priced 5.2 times their
median income, then these households have 39% of their monthly income tied
to mortgage+taxes+insurance. What happened to the 28% rule? I know that 28%
has been thrown out the window with the recent exuberence, but we are
talking historical averages.
Please check my math. Example:
Household income: $60,000
House price: $312,000 (5.2x)
Downpayment: $62,400 (20%)
Loan amount: $249,600
P+I: $1,496 (30yr, 6%)
Taxes: $390 (1.5% / 12mo)
Insurance: $65 (0.25% / 12mo)
Total mo pmt: $1,951
Total mo income: $5,000
Pct of income: 39%

This is an example, but start with any yearly income amount and it returns
the same 39%.

So is the 26 year P/E really 5.2 and the 28% barrier is really a myth, or is
the P/E of 5.2 not correct and it is really something lower? If 28% is the
true historical barrier, then the historical P/E ratio should be something
less than 3.75.

Re: P/E ratio question regarding recent RealtyTimes article

"Benjamin Pratt" <> wrote in message
news:
>
>
> Can someone please confim the data from this article for me. This is the
> first time I have seen the P/E ratio defined as the ratio between house

Real estate economists have always used in their analysis the P/E ratio. It
is the ratio between the house price and what the house would earn if rented
as you correctly stated.



> price and household income. Usually I see it expressed as the ratio
> between house price and what the house would earn if rented. In other
> words, the asset price vs. the potential asset earning, like a stock P/E
> ratio.
> So is this house price to household income ratio worthwhile? Can anyone
> confirm that this has historically been an average of 5.2? Because 5.2
> seems like it is high to me. Follow this:
> If, historically, households purchase homes that are priced 5.2 times
> their median income, then these households have 39% of their monthly
> income tied to mortgage+taxes+insurance. What happened to the 28% rule? I
> know that 28% has been thrown out the window with the recent exuberence,
> but we are talking historical averages.
> Please check my math. Example:
> Household income: $60,000
> House price: $312,000 (5.2x)
> Downpayment: $62,400 (20%)
> Loan amount: $249,600
> P+I: $1,496 (30yr, 6%)
> Taxes: $390 (1.5% / 12mo)
> Insurance: $65 (0.25% / 12mo)
> Total mo pmt: $1,951
> Total mo income: $5,000
> Pct of income: 39%
>
> This is an example, but start with any yearly income amount and it returns
> the same 39%.
>
> So is the 26 year P/E really 5.2 and the 28% barrier is really a myth, or
> is the P/E of 5.2 not correct and it is really something lower? If 28% is
> the true historical barrier, then the historical P/E ratio should be
> something less than 3.75.
>

Re: P/E ratio question regarding recent RealtyTimes article

"Benjamin Pratt" <> wrote in message
news:
>
>
> Can someone please confim the data from this article for me. This is the
> first time I have seen the P/E ratio defined as the ratio between house
> price and household income. Usually I see it expressed as the ratio
> between house price and what the house would earn if rented. In other
> words, the asset price vs. the potential asset earning, like a stock P/E
> ratio.

Below are sample P/Es:
a.. In Boston, the residential real estate market's P/E recently topped
30 -- compared with just under 20 in 1988.
b.. San Francisco's previous peak of 25.6 in 1989 has been eclipsed, with
the P/E currently at just over 27.
c.. San Diego's current P/E is nearly 30, compared with a 1989 high of
23.4.
d.. New York, by contrast, is actually well below previous peaks. The area's
current 22.5 P/E is above its recent nadir of 17.6 in 1993, but down from
28.6 in 1988.



> So is this house price to household income ratio worthwhile? Can anyone
> confirm that this has historically been an average of 5.2? Because 5.2
> seems like it is high to me. Follow this:
> If, historically, households purchase homes that are priced 5.2 times
> their median income, then these households have 39% of their monthly
> income tied to mortgage+taxes+insurance. What happened to the 28% rule? I
> know that 28% has been thrown out the window with the recent exuberence,
> but we are talking historical averages.
> Please check my math. Example:
> Household income: $60,000
> House price: $312,000 (5.2x)
> Downpayment: $62,400 (20%)
> Loan amount: $249,600
> P+I: $1,496 (30yr, 6%)
> Taxes: $390 (1.5% / 12mo)
> Insurance: $65 (0.25% / 12mo)
> Total mo pmt: $1,951
> Total mo income: $5,000
> Pct of income: 39%
>
> This is an example, but start with any yearly income amount and it returns
> the same 39%.
>
> So is the 26 year P/E really 5.2 and the 28% barrier is really a myth, or
> is the P/E of 5.2 not correct and it is really something lower? If 28% is
> the true historical barrier, then the historical P/E ratio should be
> something less than 3.75.
>