One of the key discoveries I made was that, oddly, even though rent is in the denominator of price/rent, it has such a strong effect on price that when rents rise, the price/rent ratio rises even more, and likewise, real home prices would rise even more.
idiosyncraticwhisk.com 2018 (income on log scale) |
The p-values are:
1991: .162 (not significant)
2007: 5.5 x 10-16(nearly zero)
2018: 2.5 x 10-35 (nearly zero)
And confidence levels are pretty tight. The coefficient, at the 95% confidence level is (these are on a natural log scale, so this is the expected change in Price/Rent for each doubling of rent):
1991: -0.7 to 2.0
2007: 6.5 to 10.4
2018: 5.6 to 7.3
Interestingly, if I regress Price/Rent against the median income of each MSA, or against the median price, the relationship is very strong for every year. I have written previously about how, within MSAs, there is a strong systematic relationship between Price/Rent and all three measures (rent, price, and income). Within MSAs, each doubling in price is associated with a Price/Rent increase of about 3. Between MSAs, each doubling of price is associated with an increase of 4 1/2 to 6 1/2. Possibly, similar influences are at work, and the steeper relationship between MSAs is created because between MSAs, there could be an added systematic factor - expected rent inflation.
For each doubling of MSA median income, the 95% confidence range of the coefficient for Price/Rent is:
1991: 5.4 to 8.8
2007: 9.3 to 14.4
2018: 6.9 to 9.8
idiosyncraticwhisk.com 2018 (income on log scale) |
idiosyncraticwhisk.com 2018 (income on log scale) |
But, the most interesting thing about this is the difference between the income effect and the rent effect. I have concentrated previously on how during the boom (and since) rent has become more and more a factor in home prices at the MSA level, not less important. So that rising Price/Rent levels were not actually a good signal of a bubble.
But, here, we can see that the reason that rent did become a more important signal was because rent and expected increases in rent, started to correlate with income, because of the Closed Access problem. So, yes, rent has become increasingly important, but here, we can confirm that rent has become increasingly important only as a side effect of MSA income becoming more important and becoming rationed through rent.
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