Okay. The real metric is this:

Take the amount of monthly rent the house would fetch in the current market. Add two zeroes. It is absolutely not worth more than that amount as a place to live. Conservative players in the rental market would multiply monthly rent by 70 to obtain a maximum price to pay for the house.

Got a house that would fetch $800 per month in your market? It is worth $80,000—tops—as a house. Anything above that number is pure speculative fluff, and you are quite likely to lose every bit of it (and more) moving forward should you be so silly as to pay it.

Bart,

your numbers may work in Johnson County, but they don’t work in West Los Angeles.

Or metro D.C.  Try Georgetown, Capitol Hill, Spring Valley, Bethesda, Potomac, or Great Falls.  This is because landlords rent out houses below the cost of PITI, in order to get tax breaks.  I am out of this now, but did it successfully for years at a multiple of around 200.

Let’s look at what it would cost to produce another one of Bart’s $80,000 houses.  $120,000?  $160,000?  We may have a bit more deflation, but the cost of building supplies and labor have not come down a lot.  Once the Government has to start printing money to pay off its enormous new debts (both Bush’s and Obama’s) the cost of reproducing that house may hit $1,000,000.

I bought one brick house near D.C. that was built in 1938 for $4,000.  In 1965, I paid $17,000.  Today it would sell in a week for $190,000.  It would only rent for about $1,000.

Once the excess property is taken up by teardowns and population growth.  The real value of a house will be what it takes to buy the land and put the structure on it with all the, government fees, site prep, utilities, landscaping, and other costs.  I see that trending up.  If someone wants to buy a house, they better think about right now.

(Disclosure:  I am not a realtor, and I no longer invest in houses.)

Part of the problem is that rents have been kept falsely low because of the ease of handing a No money down mortgage to somebody who obviously can’t afford it.  This will not change quickly because the huge oversupply of houses will likely be rented out for less than they are worth.  That calculus will likel change in aabout 10 years at which time people will not be able to buy a house, and rents will be expensive.  However that is sometime away.

“This is because landlords rent out houses below the cost of PITI, in order to get tax breaks.  I am out of this now, but did it successfully for years at a multiple of around 200.”

Me, I am renting out one of my houses below cost of PITI, not so much for the tax break but because the family in question needs it, the house is paid off, and because I wish eventually to hand the house to one of my children, because I suspect it will be impossible for them to buy their own homes after about 2020.