Probably, you wonder to know how your home price is now. Not necessary whether you are a homebuyer, seller or an owner, you must know rental rates and home prices are going on now.

To know whether your home is overpriced or not, you can simulate yourself calculation for your home’s value according to what have long used by Housing Economists. They used a home price/rent ratio as one way to gauge whether or not home prices are inflated or undervalued.

As Gary Smith, the co-author of “Houseonomics”, said that correlation on home prices to rents give you a more detailed view of whether there’s a financial payoff to houseowning.

For example, while a price/rent ratio is high when a home price is high, and rent rate relatively low. It indicates that the home price is too expensive and the rental earning is headed for a drop mean when home price is high, someone who will pay to rent a place is going down and the home value probably will be drop soon.

The use of a price/rent ratio is similar with a price/earnings ratio for stocks. When a stock price is high, and its earnings per share relatively low, the P/E is high. A high P/E often indicates that the stock is too expensive and the share price is headed for a drop.

For a specific look at how a home’s P/E is determined, let’s consider a home that is listed for either rent or sale in suburban Chicago.

The home has been rented for the past three years for $1,600 per month. It is currently listed for sale at $400,000. Dividing the price by the total annual rent of $19,200 gives a “housing P/E” of 20.83. According to Moody’s Economy.com, the long-run average housing P/E is 16, so a P/E of 20.83 suggests that this home may be somewhat overpriced.

Do-it-yourself calculation

You could compare the median prices to rents which is useful for tracking broad trends. But how rents compare to home prices varies considerably in different areas of the country. Calculate Your Mortgage Payment

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