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P/E Ratios as Indicators of Proper Valuation

This is kind of an interesting exercise. Take the median single-family home price for your zip code and divide it by the average monthly rent for a 2 br/2 ba apartment or house (x 12 months).

For my zip code it comes out to a little over 29 right now – way out of whack. Historically Los Angeles has had a P/E ratio between 10 and 15, although my zip code has a higher median than Los Angeles as a whole. The cost to rent the home I’m in is a third the cost of a mortgage if you bought it today. Interesting to look at these fundamentals.

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