When the housing market tanked several years ago, it made many people aware just how fragile the economy — especially real estate — is. Although the housing boom had many people feeling like they were on top of the world, the bust left many people all across the country struggling to keep their homes. With a new real estate boom in full swing, many are worried that history is only going to repeat itself. For those who are just getting back on their feet, the thought of having to endure another real estate bust is overwhelmingly unbearable.
However, according to a recent report released by the Federal Reserve Bank of San Francisco, “The current run-up exhibits a less-pronounced increase in the house price-to-rent ratio and an outright decline in the household mortgage debt-to-income ratio — a pattern that is not suggestive of a credit-fueled bubble.” In the study, the bank researched numbers dating back to 2002 and compared them to today’s situation. While researching, they also found that, “The price-to-rent ratio for housing is a valuation measure that is analogous to the price-to-dividend ratio for stocks. Dividends are the cash flows from stocks. Service flows from housing are called imputed rents. Higher valuation ratios imply that stock investors or homebuyers are willing to pay more for each dollar of dividends or imputed rent than they have in the past. Throughout history, extremely elevated valuation ratios have been associated with asset markets that have crossed into bubble territory.”
This news will certainly put a lot of people at ease, and also help them have a little more understanding of what to look for when it comes to the ebbs and flows of the real estate market.
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