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I know it’s hard to think this way. Unlike stocks, investments in homes do not come with quarterly earnings statements. Unlike stocks, the price of your home is not listed in the Wall Street Journal every day, which allows you to keep it on your books at whatever price suits your current mood. You are not the only one having a hard time with the difference between the asset price and the earnings stream.
Even the Federal Government didn’t want to do the right calculation when it computed the Consumer Price Index. Until 1983, the BLS took the asset price - the house price - as the price one pays for housing.
"Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owneroccupied housing. It was implemented for the CPIU in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985."
Bureau of Labor Statistics
http://stats.bls.gov/cpi/cpifact6.htm
The p/e ratio for Bay Area Homes Looks Pretty High
Thanks to the efforts of the Bureau of Labor Statistics, we can compute a price-earnings ratio for homes. A measure of "earnings" is the shelter component of the Consumer Price Index, which is computed for many major metropolitan areas including LA and the Bay Area. This isn’t a perfect measure of earnings, since it is only an index that is arbitrarily set to one in 1996. It is also imperfect because it doesn’t net out maintenance and management costs. Most of all, for owner-occupied homes this index is based on the owner’s guesstimate of the rental value. Nonetheless, movement over time in this index is going to give us a pretty good idea of movement over time of "earnings" from homes.
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* Edward E. Leamer,
Director, UCLA Anderson Forecast.
Check the link for author's profile: http://www.anderson.ucla.edu/faculty/edward.leamer/pdf_files/cv.pdf
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