So how can you tell if your house is overvalued? Well, that’s a difficult – if not impossible – question to answer (unless you’re an economist – but even then…). That being said, I’ve always liked this concept that was printed in the New York Times way back in 2005. It employs a mathematical equation similar to that used in the stock market, to determine if stocks are overvalued. The equation looks at a house’s “rent ratio”: You take the price of a house in a typical area and divide it by the cost to rent it for an entire year. The result is the rent ratio – and the lower the ratio, the better. Typically anything under 20 is considered “bubble safe”.
The article acknowledges this is an imperfect measure – mainly because it’s not always easy to find out what your house would get on the rental market. That being said, it has proven to be somewhat useful – and is definitely worth a shot if you’re worried about buying a home that’s potentially overvalued!