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Comment by dahdum | Hacker News Reader

Author has a great grasp of the market, and this simulation is pretty cool.

Another way to look at it is the house-price-to-income ratio, San Jose metro is the highest in the nation for individuals, #2 for households. [1]

Even better IMHO is price-to-rent ratio, which is the rental price of a home compared to the purchase ($360k home rented at $36k/yr is 10x). SV runs from 35x in SJ to 45x in SF (highest in the nation). Home values can't rise much above this unless income rises. [2]

1. https://www.citylab.com/equity/2018/05/where-the-house-price...

2. https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...

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A Price-to-Rent ratio of 45 is indeed crazy. Implied total return only slightly above 2% with quite some downside risks AND running costs + depreciation.

Rents are also quite high and it would still take 45+ years to have it paid off!

Any reasonable person would want to rent in such a situation.

There are two options here:

1. People value owning a home irrationally, the price is disconnected from fundamentals

2. People are pricing in future growth. With interest rates being low, this growth can be fairly long-term. The growth is primarily in future rent increases, but also potential interest rate decreases or irrational future growth (as in point 1).

Now, for point 2, we can actually calculate implied future growth, and then try to decide whether it is rational or not - e.g. given the market future interest rate expectations.

It would also be interesting to know who owns these houses. Did they buy them by really stretching themselves, and any downturn in the area would result in loads of forced sells, temporarily collapsing the market? Or are the owners in no danger of having to sell?

> Any reasonable person would want to rent in such a situation

If both the ratio and the prices were expected to be stable (or, for prices, declining) in the long term, sure.

But would a reasonable person expect that?

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