Housing Prices: Bargain of a Lifetime, or Much Further to Fall?

Back in November, I read an article in the Economist with the tagline “House of Horrors: the bursting of the global housing bubble is only halfway through”.

I usually pay close attention when the Economist calls a bubble, because unlike the daily rollercoaster of stock cheerleading and fear you read in most US newspapers, the writers over there have a sound understanding of, well, economics. Armed with just that relatively simple knowledge, you can usually call “bullshit” on many of the financial world’s most pronounced hissy fits, and rake in steady investment returns while your day-trading neighbors get crushed by a bear market.

In the article I read, the Economist pointed out that the housing market responded very differently around the world to the great financial crisis of 2008.

Here in the US, prices fell about 34% from peak to trough when measured on a nationwide basis. But this figure masks some even more brutal falls: in the most prosperous  and supply-constrained areas like Manhattan and San Francisco, prices barely suffered a dent. In wilder and more speculatively-overbuilt areas like Phoenix, Las Vegas, and Miami, some neighborhoods went on sale to the tune of 75% off, with foreclosures making up over half of all property sales for several consecutive years.

In the UK, prices only dipped 10% before resuming their climb. (See this nice article on Monevator for more analysis on the UK/London side of it). And in Canada, just a canoe ride away from the brutally crushed market of Detroit, price rises have continued unabated and continue to set new records. Toronto residents usually fall unconscious when I tell them that they can currently buy a luxury 4-bedroom home with palm trees and mountain views, for less than the value of their one-car parking space.

So when you ask “are houses overvalued?”, you need to qualify the question by specifying a city and country. The situation varies greatly by location. But how can you judge the true value of a home? A pad in New York City is surely worth more than an equally-sized unit in St. Louis, because the supply and demand situation is drastically different. But how much more is it worth?

Housing economists are the ones best qualified to make this call, and the way they do it is by measuring at least these two factors:

  • The price-to-rent ratio
  • The price-to-income ratio

When you look at those things, and compare them to the historical average ratios for your area, you can get a good idea of whether you’re in a bubble, or a bust.

In the US, the price-to-income ratio took a huge 75% jump through the mid 2000s, but the subsequent crash brought it down lower than ever before. It now sits at least 20% below its historical average.

In Canada, on the other hand, the price-to-income ratio is at an all-time high, at least 29% above the average. In the UK, this overvalue ratio is at 20%.

Price-to-rent ratio is simply a measure of how much a house costs, versus the gross income it would collect if you rented it out. A common rule-of-thumb here is 20. If a house costs more than 20 times the annual rent, it’s possible the prices are overheated in that area. In the foreclosure project, we picked up a house that cost about 10 times its annual rent after renovations – a good buy. In San Francisco, houses cost about 30 times their annual rent – a bad buy. Over time, these things tend to revert to their historical mean – prices will fall and/or rents will rise.

Price-to-income and Price-to-rent are cool ratios, but it’s not always easy to find a big spreadsheet of the data for every city. If you just want the quick-and-dirty guideline, you can look at a chart of  inflation-adjusted house prices. Why? Because both rents and incomes tend to rise roughly at the rate of inflation over time*, and so do house prices. If you see the house prices take off at a slope that is much faster than inflation, watch out for bubbles.

Being a big fan of economist Robert Shiller’s book “Irrational Exuberance”, I visited his website and downloaded the housing price spreadsheet, using it to generate this graph of inflation-adjusted US house prices from 1890 to late 2011:

Things got a little silly in the 2000s, but are starting to look quite reasonable now.

Dr. Shiller has been watching both stock prices and house prices for many years, so throughout the 2000s, he was calling “Bubble! Giant Stupid Bubble! Hello!? Is anyone listening? Stop buying houses and stocks! Look at my graphs!”.

Most of us didn’t listen to him, but the information has always been out there for those with the knowledge to keep an eye on it. An asset bubble forms when enough people collectively say, “This time it’s different, and the [houses/stocks/gold bars/tulip bulbs] will forever be worth more than ever before. The bubble looks like a part of the graph that doesn’t belong, suspiciously similar to what we see today with gold prices.

Nobody can predict the future with anything close 100% certainty. But using a good understanding of economics to make some educated guesses, you can occasionally spot an inefficiency in the herd mentality of the world, and avoid losing a bunch of your money in the stampede.

In today’s case, the ‘herd’ is the stream of fearful young couples I hear from regularly, who say things like “I’d never want to buy a house – look how much the prices have dropped! And have you heard about what the Federal Reserve Toilet Paper is doing to the national debt and also how the European Debt Crisis caused that Carnival Cruise ship to sink and gold bars are the only safe ingredient for salad dressing these days?”.

Back in 2006, the herd told me to “buy a 2-bedroom condo in Miami for $600,000 because it’s one of the most desirable places on Earth and the prices have gone up at 30% per year, meaning it would be worth $1.2 million before the warranty on the new fridge even expired”. (I’m only paraphrasing loosely from a few real estate brochures I read during a trip I took there at the time, but you get the idea).

So in the case of US housing, I feel confident in placing bets on its gradually improving strength. The current inventory of unsold homes has dropped to about 6 months of supply at the current sales pace (down from a peak of over 12 months in January 2009), the lowest level since the spring of 2006. As the supply continues to drop and the foreclosures gradually get gobbled up, the prices will rise again.

In my own city, I see solid returns on rental properties, and a cost of owning that is lower than the cost of renting. Equally significant, many homes are available at a price that is lower than the cost of building them, assuming a land cost of zero. By definition, no new houses will be built under this price condition, meaning that as long as my city’s population continues to increase, house prices will have to rise as the supply of available houses falls.

In Toronto, however, I’d place a different bet. House prices there have risen much more quickly than income, leaving the most recent home buyers holding record levels of debt. People are competing with each other to buy houses at more than the asking price, on the fear that prices will be even higher tomorrow. Although the Canadian financial system is more stable than that of the US in 2008, any change in buyer enthusiasm, employment, or interest rates could cause a self-feeding loop of price drops which lead to more price drops, until the price ratios above revert to their historical norms. I could be wrong, but given an uncertain future, I’ll make my bets based on my best estimation of the odds.

Your own course of action should depend on a level-headed assessment of your own country and city’s housing market. Look at the historical prices and the price-to-rent ratios in both your own city, and other places you might like to live. Renting a house or apartment for now will seem like a less bleak choice if it saves you a load of money during your working years, and allows you to buy a less expensive house further down the road in a more liveable city. In the US, however, the time to buy might be within the next very few years.

* actually, I think economists would say that rents rise with inflation, while incomes rise with GDP growth, which is traditionally a few percent higher than inflation. But in theory, this would result in us spending less and less of our money on housing over time. Therefore, it’s possible that rents and housing prices could be expected to rise slightly faster than inflation, while other products like food and durable goods rise more slowly, as we have seen over the past 100 years. But either way, I think my graph is still useful. Any economists want to weigh in?

  • Poor to Rich a Day at a Time March 9, 2012, 6:30 am

    Well I am in no way an economist but thanks for this great thought provoking article! I have always found the housing market to be an interesting subject :)

    I really enjoyed this article

  • Jimbo March 9, 2012, 6:35 am

    OOooooh, real estate… Such a love/hate relationship, isn’t it?

    Being a homeowner in Canada, all of this does scare me a little… Although I don’t live in Vancouver or Toronto (whew!), my city (Montreal) is still at all times high in all categories as well… At least here we don’t see speculation on condos. People buy them to live in them, as rents are getting crazy. However, the average available income is very low here…

    And people are building condos all over town – and I mean ALL OVER TOWN. So I think the market is in for some sort of correction or drop, most probably timed with any type of interest rate hike. But I also think then will be a great time to have a little stache and buy the nice duplex we absolutely cannot afford at current time, and keep the condo as an extra rental.

    What saddens me is seeing people in my income range buying houses 50% more expensive than what we paid (after establishing an upper limit to which we stuck). And we, who bought something not crazily priced, are the only ones paying down extra capital while everybody prefers getting the new IPad… It really is a self feeding downward spiral…

    Oh, if only there were more Mustachians… There’d be less housing bubbles, for sure…

    • JaneMD March 9, 2012, 6:51 am

      Those people who buy for such high prices are not thinking through how long it will take to pay-off and how unlikely they will be to make long term savings. Statistically speaking, apparently you aren’t supposed to purchase a home greater than 2x your income (after your down payment).

      • Jimbo March 9, 2012, 6:59 am

        I know, i know… but right now, people can buy and pay about 20% more than when renting. so it is interesting… However, people are buying without considering :

        1) there is no way to make a profit at these prices!
        2) What will happen when the rates will go up oh so slightly, even only to historical averages? These people cannot put extra money on their capital AS IS, what will happen then?
        3) But… at the same time… at least they are accumulating equity, I suppose…
        4) In Montreal, we don’t see the crazyness of Toronto and Vancouver, the prices are flatlining a bit.. that’s encouraging. So people are thinking the prices will not drop in foreseeable future…

        I am still convinced they will.

        • JaneMD March 9, 2012, 8:08 am

          Anytime I feel bad about renting and not buying, I go here-


          It reminds me how much more I’d have to pay if I bought and my ease of relocation disappears once you own something.

          • Hilary March 9, 2012, 8:32 am

            Thanks for this link, JaneMD! I can already tell I will have loads of nerdy fun playing with it.

            • JaneMD March 9, 2012, 12:02 pm

              To be supergeeky, I use craigslist as my basis of places to live in my neighborhood. Or I pretend I’m moving to Manhattan and let reality set in while watching HGTV in my call room at the hospital.

              (I have yet to explain upon entering any home/apartment ‘they don’t have granite countertops/the cabinets aren’t cherry/maple/oak like I’ve always dreamed – I can’t live here!)

            • moosejohnson March 13, 2012, 2:20 pm

              padmapper.com check it out

            • Jacob June 11, 2013, 7:14 pm

              Even better than the New York Times rent vs. buy calculator is the one from Khan Academy.


              The NYT calculator does not consider the opportunity cost of taking your down payment out of stocks, which is an important factor to consider.

    • Gerard March 9, 2012, 12:06 pm

      Montreal’s funny. Both rental and sale housing was insanely under-valued there for years because of perceived political uncertainty and high unemployment, as well as strong rent control. I remember renting a 2-bedroom (“four and a half”, in Montreal English) a 20-minute walk from downtown for $110 in the mid-1980s, and feeling like George Jefferson when we moved on up the hill to a $395-a-month place in the 90s!
      In all the big Canadian cities, a lot of the growth is being driven by people from elsewhere (English Canada and France for Montreal, Asia for Toronto and Vancouver) looking for a safe, stable, and cheap hometown. It’s more like global-level gentrification than anything else. When prices do drop, I think those cities will behave more like SF or NYC than like Vegas or Phoenix.
      That said, I just went to the MLS site, and Jeez, Jimbo, I can’t believe people expect that kind of money for a crappy little new-construction condo in Villeray!

      • Jimbo March 9, 2012, 12:30 pm

        undervalued, yes, but don’t forget the available income is lower here than in the Rest of Canada…

        Funny thing is the Rents seem to have gone up pretty much at the same rate as the house value lately, and finding a decent place to rent is getting super hard (competition is intense).

        So people buy…And they pay these prices! Which makes me scared of the reate hike, to be honest.

        And those new constructions, at least they are new! I’ve lived in old, crappy insulation apartments, and winter get pretty sucky in them. New construction feel like luxury homes when they maintain a 16 degrees C (that’s 61 F) temperature in the winter without crazy heating bills…

        • Jimbo March 9, 2012, 12:33 pm

          Geez, I am ashamed of the typos in this reply…


        • Gerard March 10, 2012, 7:35 am

          Yeah, I hear you about the badly-insulated places! And the lower wages — the average Montrealer is paid WAY less, relative to her skills and training, than people elsewhere in Canada. But the days of carrying a well-located 3-bedroom place with one minimum wage job are never coming back. Unless you move to Windsor.

  • jlcollinsnh March 9, 2012, 6:40 am

    Great post, Mr. MM….

    likely my favorite so far on your site.

    That might be influenced by my own saga of trying to sell our house at what is, hopefully, the bottom.

    I’ve long been a believer that owning a personal home is a lousy investment. But, as I recently described, it is always about running the numbers. As housing prices collapse in some areas, those numbers might start to swing in favor of owning.

    Or in some places the prices are such that owning truly is superior. I see this as I look at Ecuador for example.

    As for Toronto, based on your post, I’d be a renter for sure. And a seller pocketing my profits if I owned.

    • Jimbo March 9, 2012, 9:25 am

      You know, renting in Toronto, Vancouver, and to a lesser extent Montreal is not all fun and games either…

      Vancouver has Manhattan-like rents and crappy appartments…

      • Anonymous March 9, 2012, 6:31 pm

        Are u kidding?
        Manhattan rents are way higher.
        Prices tho are comparable.
        What does that tell you?

  • jonhohle March 9, 2012, 6:54 am

    Its interesting to see what the effects of long term debt did to the price of houses in the 1930s (introduced by the FHA, whose stated goal was to make housing affordable). It didn’t take long for people to leverage up the prices to greater than thier pre-WWI, adjusted price. Before Robert Rodriguez was huge, he would have called that solving a problem with the money hose.

    • Mr. Money Mustache March 9, 2012, 8:43 am

      I can definitely see how too-easy credit could tend to drive up our spending on things. On the other hand, it seems that house prices have tended to stabilize in most areas at around the price of land, plus the price of construction. When the value of that land is zero, which it clearly is based on today’s prices in many areas, you could say that the easy credit has not boosted prices at all.

      In the more expensive cities, it could very well be that the available credit has driven up land value. But remember that without this credit, more people would be forced to rent, which would just drive up rent prices, and profits for those of us with enough cash to buy houses without borrowing. That may or may not be an improvement for society.

      One thing that seems certain: the available credit seems to increase the SIZE of house we select for ourselves, even if it doesn’t raise the profit margin on houses. Just like it affects the fanciness of cars that people buy. If they were forced to use cash, many more people would drive around in sub-$5000 cars, and I bet there would even be simpler models available brand-new at that price. When you buy a $20,000 cars today, you’re not forking over a lot of profit to the car company, you’re just getting a really big and complicated machine that is overkill for the job of moving people around.

  • sandy March 9, 2012, 7:50 am

    OK, I do have a genuine question. My amateur opinion is such that I think the interest rates are being held so incredibly low right now to assist lending and prop up housing prices. Were mortgages at 6% or higher, I think obviously that would hurt the housing market that much more, since many times, people buy houses based on what their monthly payment would be, NOT what the houses are actually costing in total.

    So once interest rates go up (They have to some day, right? Right? Bueller?) wouldn’t the second half of the bubble come crashing down then?

    Again I am not an expert here, I am seriously asking if I’m on the right track or if I am wrong, why am I wrong?

    • Mirwen March 9, 2012, 2:09 pm

      I would tend to agree, but I’m not an expert either.

    • jlcollinsnh March 10, 2012, 6:39 pm

      Hi Sandy….

      your thinking is on the right track and certainly if rates suddenly jumped to 6% the already fragile market would collapse into round 2.

      However, if rates were to slowly begin to rise it would be very bullish for the market. Here’s why:

      At the moment, with mortgage rates and housing prices still softening, buyers are rewarded for waiting. Six months from now they will get both for less. that is powerful psychology.

      But once rates and prices begin to rise even a little, that same psychology will turn and waiting will start to be punished. Anyone wanting a house will be motivated to move off the sidelines.

  • scone March 9, 2012, 7:53 am

    Any opinions about the Australian housing market? Thanks!

    • Nath the real estate investor January 26, 2014, 2:53 am

      Australia is another world compared to US market. The GFC did nothing drastic to prices, interest rates dropped and now at record lows, and house prices rising gradually every year. Normal suburban 2-3 bedroom house at $500k is a good buy. Although people are still winging.
      Very non-MMM “Top end” suburbs in Melbourne and Sydney are fetching huge prices. The average close to inner city house is easily a million dollars and something luxury (not MMM style at all), can be worth many millions. Sydney harbour houses cost $50million! Which is shocking but which is still less than some London, Hong Kong and New York places.
      The Australian economy on the other hand is one of the best going, our people are the richest per capita in the world, mostly driven by all this housing wealth and I think in 20 years a 1 bedroom apartment could cost millions. The amount of money coming in from China is staggering. I don’t feel there will ever be a massive drop in prices, only the usual slow down, speed up, slow down etc.

  • Brave New Life March 9, 2012, 8:25 am

    Another great article, MMM. I don’t know how you keep popping them out.

    The only argument I’ll make is that I’m not so convinced gold is a bubble. It might actually be a “correction.” Check out the 80 year DOW to gold chart at the bottom of this page:


    I’m not saying I know what will happen next to it, and I’m certainly not a “gold bug” but it’s not so clear to me that it’s a bubble.

    • Mr. Money Mustache March 9, 2012, 8:56 am

      Hmm.. those graphs cover up to the year 2009 — what about the last three years where the gold price has doubled again? I guess stocks might be up about the same amount since then, but still…

      I will admit that I’m a Buffet-style fundamentalist on gold and other collectibles: if it doesn’t actually do work for me and generate dividends, then I’d be depending on the greater-fool theory to make money on it. And not only is it non-income-producing, it’s not even Useful for anything!

      When you combine this with the fact that everyone is a gold bug right now, justifying the record prices with various graphs and ratios exactly like they do with other assets during bubbles (remember the Price-to-clicks, price-to-users and price-to-earnings-to-growth ratios of the dot-com bubble?), it leads me feel very good about making fun of gold.

      I’m sure others feel very differently about this – but instead of having an argument with me about it in the comments section of this housing article, I would encourage them to just go buy some gold instead ;-)

      • jlcollinsnh March 9, 2012, 9:47 am

        how about if I just want to say, ‘right on!’?

        now I’ll go sell some gold. oh, wait. I already dumped it all.

        now if I could just unload these damn Beanie Babies….


      • kiwano March 9, 2012, 9:48 am

        While gold is certainly overvalued, I wouldn’t go so far as to say it’s not useful for anything. Of top top of my head, I’m willing to claim that its fantastic conductivity and corrosion resistance make it an excellent material for plating electrical contacts that aren’t exposed to much mechanical stress (at which point platinum group metals become a better choice, but they’re even more expensive than gold). Its ductility and relative inertness also suit it well for making very fine filters/sieves.

        But yeah, I’d even consider going so far as to take a short position on gold. Even outside of the current bubble, who remembers what happened to silver prices when we figured out how to make photocopiers work without silver-based photographic chemicals. Anyone care to speculate on the role that rampant silver speculation played in the development and adoption of that particular technology?

      • quakerplain March 9, 2012, 11:50 am

        Why thank you for the suggestion, don’t mind if I do!

        A bull market climbs a wall of worry taking as few with it as possible. Even
        though I came to the party late, my own holdings have doubled in value
        since 2007. Or should I say the buying power of your paper has been
        cut in half. A 1963 silver quarter will still buy a gallon of gas, and an
        ounce of gold will still buy a very nice mans suit. You are correct. It
        just sits there, the ultimate storehouse of value, and the currency of
        last resort. My mentor knows currencies. Not only did he parlay $650
        dollars into fifty million by buying 300 British sovereigns, he took ten
        thousand dollars in cash and grew it into 600 thousand by just leaving
        it in certificates of deposit in the bank. I’ll leave it to you to figure out
        how he did that. I will tell you it wasn’t in vanguard index funds.

        But I agree with you. The rental market is very strong if you have cash
        or can find someone to loan you money. The long term outlook is
        very good. Kyle Bass is bullish on real estate in the long term. Kyle
        looked at real estate booms over the last one hundred years and
        determined that the time interval peak to trough was about eight years.
        Kyle Bass, if you were not aware, called the end of the housing bubble
        and became a billionaire on his bets. Recently he went long buying
        heavily into the sub prime market.

  • Mr Mark March 9, 2012, 8:53 am

    I’ve lived around the world, and to me the housing market in the US offers some of the most amazing value deals I’ve ever seen right now.

    People in the UK, Beijing or Australia would be blown away by what they could buy here. It’s crazy. The rental returns too – as people from outside US have noted in the forum – are excellent. The foreclosures have created some historic buying opportunities, for those with some cash especially.

    The place we bought recently (not a foreclosure, there haven’t been any in our neighbourhood), the land alone was valued at more than the total we paid for the deal – a free house!

  • Mr Mark March 9, 2012, 8:58 am

    Brave New Life, as for Gold, those graphs you link to actually show how seriously overvalued (2-3x) gold is right now, IMHO.

    • Brave New Life March 9, 2012, 10:58 am

      Let me start off by saying that I have no clue what will happen next, nor do I believe a historical chart can in any way predict the future.

      What I saw in the chart is a very long term cyclical pattern (>30 years) of the dow/gold ratio. In the past cycles, the ratio dips down to around 5:1 or even lower. The ratio right now is at 7.6. If we assume that 5 is the naturally recurring ratio on 30 year cycles, that means either the DOW needs to drop or gold needs to rise. That’s all I meant to show.

      I don’t think there’s anything magical about a ratio of ~5, nor do I think we will necessarily droop to that ratio on this cycle. But I won’t rule it out either.

      Personally, my investments are allocated as a Permanent Portfolio, so I actually don’t care which outperforms which, since I’ll just reallocate as they cycle.

  • Dorothy March 9, 2012, 9:04 am

    This is a very thought-provoking article. I was especially pleased that your analysis of the current U.S. house-price situation (at least some places) isn’t as dire as your article title suggested it might be at first glance. Your reference to Canada (and Toronto in particular) is a perfect comparison (at least to the U.S. in 2008 in my opinion). The only thing you don’t mention and the thing that fogs the typical analysis is the massive infusion of Asian money that is pouring into real estate in places like Vancouver (and even Toronto). How one can establish a price in such a market gets a bit muddied since it becomes as much a matter of the economies (and bubbles) in Beijing and Hong Kong and Delhi as it does locally. The politicised movement of such money to ‘safe havens’ contributes to the bubble and no doubt there will be a correction; but, it might also be what has sustained said bubble beyond what happened in the US four years ago.

  • et March 9, 2012, 9:10 am

    But there’s more to housing than prices:

    In some areas there are virtually no (good) rentals
    Crappy landlords, lack of home security, inability to make home/land improvements when renting

  • PJBChicago March 9, 2012, 9:11 am

    MMM you must be psychic. I was going to email you a request for an article on this topic today and here it is. Very helpful. Thank you.

  • TLV March 9, 2012, 9:30 am

    I would agree that housing’s unlikely to fall much further, but I’m hoping it takes a few more years to recover as we’re in exactly this situation:
    “Renting a house or apartment for now will seem like a less bleak choice if it saves you a load of money during your working years, and allows you to buy a less expensive house further down the road in a more liveable city.”

    For the price of a 2 bedroom condo near work, I could get a 2400 sq. ft. 5-6 bedroom house in the area we plan to move in a few years.

  • Paul F. March 9, 2012, 9:51 am

    I just put a condo in contract in SF which is ~ 16X annual rent. I usually use 15, but San Francisco has never been this cheap, on a relative basis.

  • Dragline March 9, 2012, 10:08 am

    Location, location, location! I.e., unless you invest in property all over the place, all that matters is what is going on in your local market and the national figures are next to meaningless. Even in the DC area where I live, anything close to town has held up or even gone up in value, while the outer suburbs took a huge bath.

    I do see a trend of people moving closer to work and/or in to cities or nearer to public transit, except for the “dead” ones like Detroit.

    Now, I do have a small house for sale in the Bitterroot Valley in MT if anyone is interested. Five acres of land, mostly flat and 2/3 wooded, and creek runs through it.

  • Marcia March 9, 2012, 11:49 am

    This is a great article. I was just talking about this with a coworker yesterday. He’s uncomfortable with 401k’s and decided to use his money to buy a rental property instead.

    Our purchase price was awful. bad timing. And were just weren’t thinking in the “is this a good buy” kind of way for the market/area. We were worried that if the market kept going up, we’d be priced out forever.

    Well, right now smaller older homes in my hood are about even. I would say we are right at the 20x point. And if you bought a home with 20% down, your rent would about cover the mortgage and property taxes.

    My coworker just bought a 2BR, 1BA condo. Condo prices have really fallen, and condo rentals are strong, and not too far behind homes. So I did his calculations, and he’s at about 12x (condo price 12x annual rent). So that’s not a bad deal.

    I must say I’ve been a bit tempted. Condo prices here are low enough that we could swing it. But with a kid and a new baby on the way, I’m just not up to the task right now. However, I continue to watch the market, and you never know – there might be a “right time” soon. When people ask me how I feel owning a home worth 2/3 what I paid for it, I just say “eh, it sucks. Hindsight is 20/20. I like my home and hope to retire in it.” Well, what will you DO if the value drops to $250,000??? “Um, buy a second house.”

  • Christine Wilson March 9, 2012, 12:47 pm

    I know someone who is buying his first home in Toronto for $500K. He’s gone through bidding wars where people are out-bidding them by up to $100K! All for a semi-detached fixer upper in a nice neighborhood. I bought outside the city for about 1/3 of the price. However I have to commute.. not very Mustachian of me. My husband and I share a car though – so hopefully some points for that!

    The Harvard Law Superstar who makes $200K.. his mortgage is only $300-$350K! Crazy difference. I wouldn’t be surprised if this were a bubble.

    • Monevator March 10, 2012, 1:20 am

      Canada is a bit like Australia, in that its commodity boom has partly saved its housing market. Both do have the distinction of having some of the most beautiful and liveable cities in the world though. At least if there’s a crash some day, the scenery will be nice! ;)

  • Mr Mark March 9, 2012, 1:15 pm

    Hey, Detroit’s not “dead”, and people are moving there for jobs, to avoid the commute, for the super affordable prices, and to live in a nice relaxed urban vibe.

    You’re 10 years out of date!

    • Dragline March 9, 2012, 2:27 pm

      I stand corrected and am glad to hear it!

  • BDub March 9, 2012, 2:57 pm

    This is a good analysis on the rent vs. buy question. How do you parlay this analysis into whether or not now is a good time to move to a more expensive home?

    I have run my own cost of commuting analysis and have found I could spend an extra $100K to be 6 miles closer to work and we would be financially in the same place. The problem is that the homes in the area closer to work are ~ $150K more expensive. Is it worth the leap?

    • Mr. Money Mustache March 9, 2012, 10:11 pm

      Hey Bdub, that’s a great thing to be calculating!

      I guess the real clincher would be if the new place lets you stop driving to work and start biking at least some of the time. The quality of life increase from not being car-dependent is worth a lot more than the extra 50 grand. Maybe there are other quality advantages to the new place too – walkability, culture, stores, schools.. or maybe not.

      If it’s just a drive/drive comparison, it might not be worth moving, especially if you’re close to a possible early retirement, where you cut your working years significantly by not putting more into the house.

      • Gerard March 10, 2012, 7:46 am

        The underlying “big idea” here interests me: thresholds. Getting a mile closer to work is good, but it becomes great when that’s the mile that lets you get rid of a/the car. Reducing your energy consumption is good, but it’s great when you save the kilowatt that lets you live off the grid. And a bunch of other stuff is like that, too: the dollar saved that lets a parent stay home, the insulation/siting that lets you choose a different heating source, the diet change that lets you have a smaller fridge, the dollar earned that lets you pay off your credit card in full each month…

    • Brugs March 10, 2012, 7:52 am

      It sounds like you already proved that it is not worth the leap.

  • Leo March 9, 2012, 4:09 pm

    Hello there! New around here, but already letting the mustache grow (which, for a girl in my town in nice only in figurative ways !).
    Living in Portugal, a country you’re now hearing a lot about, unfortunately not for the best reasons, my steps in this “housing department” were dictated by some prejudice I have from a long time. Getting divorced, I rented for a while, until I found a house I liked. Because:
    1) If when buying you pay similar amounts to rent, then why not pay for something that you will own instead? I considered the rent paid as a fee for time to think and seek, otherwise I would think of it as money sent down the drain. I’m now paying less per month than I then paid for rent.
    2) I wanted to have a place of my own, not intending to sell soon, but as an “investment” to not have to pay a rent for the rest of my life and pay that only for a few years instead. Being a baby mustachian, I find this important to my financial freedom.
    3) I have a loan, but I don’t intend to pay it in 50 years, as banks would like me to do before the bubble bursted. I intend to do it in only a few years (and yes, the loan was approved before this whole PIGS story became insane).
    Yes, I will have to pay taxes on property, insurance, maintenance, but I have a place I call my own, I’ll paint it black or orange, and when its paid my fixed costs will become very manageable. And that gives me better sleep at night!
    I enjoy a lot reading this blog and it inspires me on my quest for “independence” in a lot of ways. Not going with the flow in a wide range of personal finance habits my fellow countrymen indulge themselves, I found hope and support in this blog author and readers. Many thanks!

  • Ty Webb March 9, 2012, 4:10 pm

    The Canadian and the US couldn’t be more different right now. I just read an article about a small bungalow in the Toronto suburbs going for $400k over asking at $1.2 million!

  • yourPFpro March 9, 2012, 5:42 pm

    I always think it’s funny when I see stats related to housing because I live in SoCal. None of those stats apply to SoCal haha. Prices may have gone down a bit out here, but not much! I still had to pay 280k for a 2 bed/2 bath 1200 sq ft. condo in a 20 year old building 10 mins. from the beach!

    • Marcia @Frugal Healthy Simple March 10, 2012, 12:01 am

      Depends on where in So Cal. I’m in Santa Barbara. That condo here would be more like $400k. But in 2006 it was $600k. Most of the houses in this area are down 1/3 or more from the peak in ’04-’06.

  • Rich M March 9, 2012, 6:54 pm

    Robert Shiller is awesome. I love the field of behavioral economics.

    Funny, today on NPR.com, I read a story about a 14 old girl who bought a auctioned house in Florida for $12000 (valued at $100000 in the peak) with her mom and rents it for $700 a month. She sold the junk in other foreclosures on craigslist, making $500/month before that. She wants to buy another home she says.

    She might retire before she can legally drink at this rate.


  • average guy March 9, 2012, 7:15 pm

    as they say,

    P = (location) X 3

    In the SF Bay Area, real estate varies tremendously, and it all depends on where you want to live. Wife&I bought a relatively cheap home in a mediocre area, but we like it. It’s cheap enough and I can afford to live here. (Weather! In this part of the world,, it is Great… never snows, don’t need air conditioner in the summer! heaven….!)

    The recession and housing crash did skew things. Things move in cycles, like the stock market. Fortunate to avoided having bought at the peak, fortunate not to lose my job in the recession (only after…).

    When I was thinking of buying some 12 years ago, I spoke to an older friend and I said “maybe I should wait until prices come down”.
    He said: “I’ve been waiting for forty years.”

    • Mr. Money Mustache March 9, 2012, 9:53 pm

      You’re right.. in some areas where there is just so much money and job growth, prices can take generations to come down, or it may never happen. The number of multimillionaire 30-40 year olds in the bay area is astounding. You’d need the whole high tech industry to move on somewhere else – and the unusual number of entrepreneurial people to go with it – to really destroy the bay area housing market.

      In that situation, you’ve got a good strategy – pay the high price if you can afford to live there. I deliberately turned down all job offers for that area because the salaries were barely higher yet the house prices were more than double (this was back in 1999 and I was a pretty junior engineer). But if I were to go back now and settle into some Señor Executivo position at $1M/year (dream on, right?), I’d buy an expensive house and just be done with it.

  • Mr Mark March 9, 2012, 8:29 pm

    Of the few financial transactions I regret, 2 of them were selling real estate too early…

    If you can get a piece of the planet that pays a great return, how good is that?

    I’d like to see some comparisons with real estate in other places: UK, Aussie, Canada, EU,… The USA is an unbelievable buy.

  • Monevator March 10, 2012, 1:18 am

    While I don’t doubt the suffering it’s caused many — especially those whose who should never have bought a house in the first place, and didn’t have the wits to know it (rather than the simply greed) — I’m extremely jealous of the US housing crash.

    Here in the UK, I was waving graphs about like Robert Shiller, and I decided not to buy in about 2003/4 which was about when they started to look very over-priced in London versus income and also rent. (They pretty much always do against inflation in the UK — house prices have risen here at a *real* rate of about 2.5%-3% a year for decades).

    As you note, we got our crash for five minutes in London. I think I’d popped out to grab a pint of milk or something, and that was it, I’d missed the moment.

    US prices look grand now, especially if you’re an owner occupier buying with a very cheap 30 year mortgage. I’ve actually considered buying a rental property in Florida or similar, but not sure I’d like to deal with faulty wiring or whatever from 2,000 miles away! ;)

  • Chucks March 10, 2012, 3:24 am

    Thanks JaneMD for the NYTimes Calculator.

    The biggest problem people make in deciding between renting or buying is that they frequently compare the rent of a house to the purchase price of an identical house. What ticks me off is the fact that these calculators like the NY Times buy-or-rent use the term “annual savings”. Concluding that buying “saves money” in a comparison like this assumes the amount of space/amenities in the home is a requirement, when it almost always isn’t. One “saves money” in most of these buy vs. rent circumstances in the way one saves tons of money by buying a new LED TV that’s on sale. Those focused on early retirement should really be wondering if purchasing a house generates a return greater than renting a room in the cheapest conditions that meets their needs while investing the amount they haven’t spent on downpayments, mortgage payments, property taxes and furnishing the whole enormous house with crap.

    House buying with a mortgage as something other than a luxury might make financial sense if you were to purchase a home and then rent out a few rooms. Then rental income, sharing of utilities, property appreciation and mortgage tax benefits could turn a profit versus renting a room and investing your down-payment.

  • MyCF March 10, 2012, 5:23 am

    I must say after looking at buying a house when I moved to my new area that the Canadian market has been ‘healthy’. The cost of renting a house only a few sq feet smaller than a house would save you some major dough, sometimes over half of what the mortgage for a similar place would cost.

    Although I do live in an overvalued area where prices do not match what you are actually receiving.

  • Chris March 10, 2012, 10:17 am

    Great article MMM and thought provoking. A few years ago I made the goal of buying 5 houses by the time I was finished with my 20 year military career (not so sure I want to buy 5 now). It’s easier to do in the military, simply for the fact that you move every 3-4 years. So far I have two and am thinking about buying a third next year. Wish I had a crystal ball and could tell what is going to happen in the U.S. and more specifically the California market where I currently reside. I’ll have to run the numbers you propose in your article and see where my current house sits according to those.

    The thing I have found amazing in dealing with houses is that the mortgage industry is set up to cater to those who fail to pay their mortgages. It gives them options to refinnance, but a guy like me who has never missed a payment has a very difficult time taking advantage of these great low rates without a sizable fee upon refinancing. You would think the mortgage industry would cater to people that are responsible in paying their bills, simply for the fact that it keeps the housing market healthier in the end?

  • M. Alice March 10, 2012, 12:01 pm

    Excellent post, MMM! Thought provoking with lots of tips, insights and stats to back up everything you’re saying.

    I live in Toronto and I feel grateful that I purchased my house below market value in a series of complete dumb luck and timing.

    I’m itching to acquire another property, an apartment, but I simply can’t believe that a 1-bedroom condo downtown is the worth the same about as the 3-bedroom home I purchased 30 minutes by local transit outside of the downtown core.

    Great food for thought!

  • BDub March 10, 2012, 1:43 pm

    It does get me 6 miles closer and gives me access to a bike-able commute. Part of the $ savings though includes being home to see my family more but I loose that time savings if I am on a bike for an hour.

    Either way, I agree with you. That extra $50k is worth it (which is why we are looking….)

    The other side of the coin is that I could just get a job that pays less but it closer to the current house. That’s a different analysis. Back to the spreadsheets!!!

    • BDub March 10, 2012, 1:51 pm

      This was supposed to be in response to MMM on my earlier post…

  • Jasper March 10, 2012, 2:24 pm

    My take; certain Us markets have value. I think your stat on available inventory is low though.

    Canada’s major cities -> bubble, no question. When new existing condos are cash flow negative, and new un-built are even more expensive you gotta say *wtf*. Many homes can be rented MUCH cheaper then buying the same / equivalent. It’s not different there (they just think it is).

  • Jeff March 10, 2012, 3:24 pm

    That’s one very well thought out article. Highly commended.

    Websites such as this one where the author publishes when he feels like it are often much better source of intelligent analysis than newspapers where journalists have to write several articles a week.

  • Earn Save Live March 10, 2012, 6:03 pm

    As an American expat in Australia, I’ve been following the news on housing prices in both countries. Australians, by and large, believe that they high housing prices here are not indicative of a bubble. But then you have experts like Jeremy Grantham who argue that Australian houses are now valued at 7-9 times average incomes, which is simply unsustainable.

    For now, we’re taking a wait and see approach. We’re holding onto our rentals in the U.S. until they regain their value. And we’re waiting to buy property in Australia until we have either a more substantial down payment or housing prices fall from their peak. Right now, our rent is $3,000 a month for a home that would sell for at least $750,000. Australia’s use of negative gearing, I think, encourages speculation and inflation housing prices.

  • Concojones March 10, 2012, 9:56 pm

    House prices rise with income levels. There is a rule that house prices have historically been 3-5 times median household income.

    This also explains why house prices will skyrocket when affluence hits a region – see Silicon Valley. Or if a depression sets in in a region. Income levels do not necessarily outpace inflation.

  • GregK March 15, 2012, 1:27 pm

    Economist here — your approximation is good enough to see the swings through the early 2000s were, well, insane. There’s no reason to approximate, though. The CPI’s components are readily available. FRED is probably the easiest place to get them:

    Rent: http://bit.ly/xFzEJU

    And personal income is easy to get, again from FRED:

    PI: http://bit.ly/z1CeHm

  • Christine Wilson March 20, 2012, 10:19 am

  • Elkbark June 15, 2012, 5:41 pm

    Are there methods you can recommend to profit from a coming housing bubble burst? For example is there a way to “sell short”, like you might a stock, a given housing market, or even a specific property, if you believe the value is about to drop by a significant %?

    • GregK June 20, 2012, 2:16 pm

      If you own a home, sell and go rent an apartment. After the bubble, buy your house back at a new low price :-).

      A more practical (though riskier) way would be to short sell REITs. See MMM’s article on REITs:


      By the way, as an economist who pays very attention to the housing market as well as the broader economy, I think now is a pretty terrible time to do either of these things. You’ve been warned!

  • Anonymous March 8, 2014, 5:06 pm


    “when I tell them that they can currently buy a luxury 4-bedroom home with palm trees and mountain views, for less than the value of their one-car parking space.”

    Please tell us exactly where you are talking about.\


  • Kevin March 17, 2017, 11:55 am

    and here in Toronto the market has continued to inflate. would not touch a house with a ten foot pole right now in 2017.

  • Brad March 28, 2017, 11:16 am

    You asked if an economist would weigh in on whether home prices should increase faster than inflation. Robert Shiller says that it’s been 0.6% above inflation over the last 100 years and explains why here: https://www.nytimes.com/2016/07/17/upshot/why-land-may-not-be-the-smartest-place-to-put-your-nest-egg.html

  • Jonathan Ramos April 27, 2017, 7:45 am

    I was wondering MMM how do you see the current housing bubble? Here in Boston the rental property I bought 4 years ago has appreciated in value about 70%. I do not see how this can continue increasing at this rate.


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