In today's (April 21) NYT, David Leonhardt writes that rent ratios - the market price of a house divided by the annual rent of a comparable house - are suggesting that in many regions of the country, the purchase of a house makes more economic sense than renting a comparable house (In Sour Home Market, Buying Often Beats Renting). According to Leonhardt, when the rent ratio is above 20, renting makes more economic sense. When the rent ratio is below 20, a home purchase makes more economic sense. "In many large metropolitan areas, including New York, Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, the average ratio is now 16 or lower. It was more than 25 in several of these places at the peak of the bubble, about five years ago."

The National Association of Realtors calculates a Housing Affordability Index (HAI). This index is a function of the level of mortgage rates and the ratio of house prices to household income. The lower the level of mortgage rates and the lower the house price-income ratio, the more affordable is a home purchase (i.e., the higher is the value of the HAI). The HAI index =100 when median family income qualifies for an 80% mortgage on a median priced existing single-family home. A rising index indicates more buyers can afford to enter market. Chart 1 shows the history of the HAI from January 1971 through February 2010. The highest reading for the HAI was 184 in January 2009. The February 2010 reading was 176. The HAI is sending a signal similar to the Leonhardt's rent ratio - owner-occupied housing is a buy.

Eoin Treacy's view The Case Shiller Composite 10 Index has lost downtrend consistency suggesting that a bottoming out process is underway. Affordability has risen as prices and interest rates have fallen and sales are rising. (This additional story from Bloomberg by Courtney Schlisserman may be of interest). However, supply, not least the increasing numbers of foreclosures, continue to keep a lid on price increases. If history is any guide, it could take at least a few years before the excess supply built up during the bubble years is absorbed by the recovering market on aggregate. Individual markets may recover faster.

Companies such as Lennar Corp, Pulte Homes, Toll Brothers, DR Horton, MDC Holdings, KB Home among others are benefiting from this news and appear to be in the process of breaking out of 2-year and counting bases. This High/Low Filter and Performance Filter of companies in the sector may also be of interest. (Also see Comment of the Day on March 2nd and November 16th 2009).