In a report for Forbes.com, Hotpads.com, an aggregator of rental listings, produced a price-to-earnings spread for each ZIP code in the country’s 40 largest cities by comparing rental costs with buying costs for similar properties, based on number of bedrooms, location, and price per square foot.
A price-to-earnings ratio, or P/E, expresses how much a buyer has to pay for each dollar of return. Buyers in high P/E neighborhoods pay a huge premium to live in the area relative to how much it costs to rent a similar property there.
A high P/E can simply mean a neighborhood is overpriced, but it can also indicate where buyers have gambled that the area will ultimately appreciate further, turning an overpaying buyer into a smart investor.
#1 New York, TriBeCa, ZIP code 10013, Purchase-to-rent spread: 36.3
# 2 Boston, Chinatown, ZIP code 02111, P/E spread: 30.5
To the outsider (the readers of Forbes.com, for example), it sure may look as though a high P/E might show areas with the potential for growth.
But, if you know anything about Boston neighborhoods, you can see why this data is of limited use. ZIP Code 02111 includes Boston’s Chinatown neighborhood, but it also includes the section of Tremont Street that faces the Boston Common, and includes two high-end, high-rise properties, the Grandview and the Ritz-Carlton Towers.
There is little in common between the two, beyond ZIP Code.
Source: Neighborhoods Where the Bubble Hasn’t Burst (the title makes absolutely no sense and has nothing to do with the article) – By Matt Woolsey, Forbes.com by way of Realtor.org