House Prices: 2,262% increase (July 2024)
Average House Prices Average Rental Rates CPI (Inflation)
Quartlerly Increase, Q1 1963 - Q2 2024 https://fred.stlouisfed.org
1963
Rents: 955% increase (July 2024) Inflation: 930% increase (July 2024)
Median Sales Price of Houses Sold for the United States, Dollars, Quarterly, Not Seasonally Adjusted Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average, Index 1982-1984=100, Quarterly, Not Seasonally Adjusted Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Index 1982-1984=100, Quarterly, Seasonally Adjusted
Put another way, the average rental property purchased in 1963 for $40,000 would be worth approximately $905,000 today. If the rent in 1963 for this house was $300 per month, today it would be $2,865. Not bad, right? Wrong. Assuming a 30% expense ratio after increases in taxes, insurance, maintenance, utilities, etc., the net operating income would be about $24,000 per year. If the equity is $850,000 after sale costs, the property now is earning a mere 2.8% annual yield on equity. Going back only 16 years, the average price of a home in the U.S. has doubled (100%), while rents have increased by 70%. In certain markets on the West Coast, however, there is a much greater
delta between home-price growth and rental growth (e.g., San Diego, South Orange County, Silicon Valley, Seattle). In some of these areas, we routinely see rental properties whose yield—as a percentage of equity—is below 2%. You may be thinking, why should I sell my rental SFR or condo if it has appreciated so well? First, your “dead” equity, if relocated to another property paying a modest 4% annual yield, could generate twice the cash flow of a property only yielding 2%. Perhaps more importantly, the factors that drove your home values up over the last 10 years may not apply to the next 10 years.
IN SOME OF THESE AREAS, WE ROUTINELY SEE RENTAL PROPERTIES WHOSE YIELD—AS A PERCENTAGE OF EQUITY—IS BELOW 2%.
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