In the CoreLogic [1] U.S. Economic Outlook for July, Frank Nothaft, SVP and Cheif Economist, explains the price-to-rent ratio as an additional metric on markets that are flagged as 'overvalued'. This ratio provides perspectives on whether prices are "out of sync with valuation fundamentals," according to the report.
Nothaft goes on to explain how CoreLogic's Home Price Index and Single-family Rental Index construct the price-to-rent ratio and observes how the ratio has evolved since the first quarter of 2001. Nothaft defines the term "cap rate," expanding on the three factors that will vary across metros and fluctuate over a long period: the level of long-term interest rates, the perceived riskiness of real estate investments, and tax code changes that are affecting real estate profitability.
"Of these three factors, the one that has changed the most between 2001 and today has been the level of long-term interest rates," Nothaft states in the video. "Consequently, cap rates for single-family rental homes are down significantly since then. The cap rate decline implies that the price-to-rent ratio would need to grow by more than 60 percent since 2001 before today’s prices are disconnected with rental income fundamentals."
Click below to see what else CoreLogic indicated in their U.S. Economic Outlook: July 2018 video.