A price-to-rent ratio for housing is similar to a price-earnings ratio for stocks, and this measure of home values is preferred by most investment professionals because it measures the present value of future earnings. Even though many homebuyers live in the home and therefore earn no rent, a recent Economist housing report reconciles the owner-occupant issue by saying home ownership “benefits are captured by the rents earned by property investors, which are equivalent to the tenancy costs saved by owner-occupiers.”
Below is a table from that report showing which global housing markets are under- or over-valued on a price-to-rent basis. There are two figures for the United States, both using S&P Case Shiller data and both close to fair value on a price-to-rent basis. The 10-city index shows home prices as 3.3% overvalued, and the national index shows home prices as 3.1% undervalued. Keep in mind Case Shiller indices are for single family homes only, but they are still the broadest and most reliable home price indices for the U.S. Also, here’s the Economist’s interactive chart to look at global housing prices over time.