The measure is analogous to the price-earnings ratio for stocks, said San Francisco Fed research adviser Kevin Lansing, and “we know that when price/earnings for stocks gets way above its long-run average, that’s a reason to worry about bubbly asset prices.”

“The claim was, in 2002-2003, that the Fed left interest rates too low for too long,” said Morris Davis, academic director of the Center for Real Estate Studies at Rutgers Business School in Newark, New Jersey. Now, “what Fed policy makers will ask is: what is the natural place that this rent- price ratio should be?”

The ratio hasn’t yet reached the danger zone, Lansing said, because conditions didn’t really get frothy until 2004 or 2005. Even so, the Fed is acutely aware that waiting for unbalanced conditions to form can mean waiting too long: In 2009 then-San Francisco Fed President Janet Yellen said what had “become patently obvious is that not dealing with certain kinds of bubbles before they get big can have grave consequences.”

It’s also true that rising prices paired with low interest rates can encourage risky lending, Lansing said. Even so, the run-up in leverage that came alongside home price appreciation back in the 2000’s isn’t replaying yet, a fact in which Fed officials can take heart.

"Now we have a few little pockets, areas of concern, but they seem to be pretty small, and the leverage that we see in the economy now doesn’t seem to be very pronounced,” New York Fed President William C. Dudley said Monday at a Wall Street Journal forum, responding to a question about whether he’s worried that bubbles are forming in areas including real estate and automobiles. Conditions "are not any reason for a great level of concern at this point."


Yellen’s View


Dudley isn’t alone in being untroubled by asset prices: Chair Yellen called the residential real-estate market “very depressed” in September, referencing housing starts, which remain subdued. In its July semiannual report to Congress, the Fed said residential valuation measures were close to historical norms but mentioned that “valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly.”

From his seat at the San Francisco Fed, Williams has a bird’s-eye view of one of the hottest housing markets in the country, which may inform his assessment. The Bay Area is so expensive that some -- including Jeff Hanlon, 41, and his husband Rem Jurado, 25 -- are cashing out.

“The prices have skyrocketed, and what you could get for the money was basically soul-destroying,” said Hanlon, who moved to Richmond this March, buying a $710,000, five-bedroom house with nine fireplaces, 3.5 bathrooms and hardwood floors instead of the one-bedroom condo he thought he could afford in the Bay Area. Hanlon and a previous partner sold their property last year into what he called a “voracious market.”

Even if imbalances are arising, there may be a limit to what the Fed can do with monetary policy to prevent real estate from overheating.