Yes, SF of 20 implies gross return of 5%. (1/20=0.05)
Think of it as a Price-to-earnings ratio for housing.
The scale factor in the range of 8-13 (and the corresponding gross return of 7.6% to 12.5%) reflects people’s opinions of where they would buy or hold property. Again it is relative to other investments that matter.
A range of 8-13 is a huge range. (60% difference)
Why is this important ? If I think that homes will drop to 8x annual rent, but they only drop to 13x annual rent (because competing investments are in the 5% range), then my prediction for price lows will be off by ~60%.
Property owners don’t determine the SF, the market does. Right now it is in the 16-20 range for SFR in San Diego(OUCH !)
I wholly expect this to correct to the 8-13 range. Does that mean that I expect a > 50% drop in the price. NO. If the ratio drops to 8 (12.5% gross yield), then inflation must be running high and the bulk of the drop in ratio would be due to rental increases. If the ratio drops to 13 (7.6% gross yield), then inflation must be low and the bulk of the drop would be due to price decline, but would be less of a decline.
