Appraisers normally use monthly rents and monthly factors when appraising SFRs, condos and 2-4s. The monthly factor is referred to as a “Gross Rent Multiplier”.
The use of annualized factors is generally reserved for apartment properties (5+ units) and non-residential properties like office and retail. The annualized factor is referred to as a “Gross Income Multiplier”, and we sometimes measure it as different points in the income stream, such as either before or after vacancy/collection losses, or after consideration of any rental concessions. For residential properties, appraisers just stick to the monthly rents.
A annualized gross income multiplier of 10.0 (sale price/ annual rent = 10.0) would equal a gross rent multiplier of 120 (sale price/monthly rent = 120).
The 1995 GIM average for houses of 9.7 would equal a GRM of 116.40, which would have actualy a little higher than what the apartment properties were selling with at the time.
The thing to remember about the 1995 prices is that they were undervalued relative to the long term trend, so I don’t think you should be using a GRM of 120 (= GIM of 10.0) as your baseline. It probably should be closer to 145 (GRM) or 12.0 (GIM), and vary off of that.
The GRMs we were seeing of 280-300 x monthly rents would equal an annualized GIM of about 24.0+, so you can see that off of the peak we would have had a long ways to go in order to get the rent/price ratios back down to the 145-165 (12-13) ranges.
Let’s give our bulls the benefit of the doubt and say that rents will continue to climb at a double digit pace. If we start from an average of $1,900/month for an existing 10+ year old 3bd/2ba home. How far up would the rents for that home have to go in order to meet a declining price structure (now at $550k) at the 150-165 GRM rate? Assuming the rents are increasing by 10% per year and the prices are decreasing by a similar amount, we can lay out the scenario.
Under this scenario it would be 2009 before the rapidly decreasing price structure intersected with a rapidly increasing rental structure; assuming those opposing trends could occur simultaneously for any length of time.
The resulting $400k median price would represent a 27% decline in pricing, and the $2,528 rent would represent a 33% increase. Bear in mind, this what-if only corrects down close to long term trend line; it doesn’t overcorrect like every other downswing normally does – it would take at least 1 or 2 more years at these same rates to do that.
The other thing to remember is that the rental market for homes is not the only game in town for a rental tenant – houses compete for rental dollars with apartments and condos, so we’re not just talking about the one rental segment increasing by double digits during an RE downturn; we’re talking about all rentals increasing in varying degrees.
Speaking of which, am I the only person on this board who finds the idea of the rental market rapidly increasing during the same time frame the sales market is crashing to be…implausible?
