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Three Cents Worth: Rental Market Gets Multiplied and Mean

[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller is doubly inspired by Renters Week.]

In honor of Curbed's Renters Week, I thought I'd revisit the topic of multipliers, building on yesterday's post that compared the Manhattan rental and sales markets. The multiplier is one way to gauge the relationship between what an apartment sells for and what it rents for. Unlike the housing boom in the mid-decade when sales and rents grew disconnected, it still comes down to basics. While home purchases are not always economically driven by what they rent for, theoretically they should be within reach. The disconnect between rental and sales prices during the boom was essentially free credit?there are many who believe that all housing indicators eventually "revert to the mean,"i.e. return to their long term trends.

Multiplier = median sales price/annualized median rental price (all adjusted for inflation)

Of course I am dealing with 2 different data sets (rentals and sales) and it could be argued that since the average rented apartment (828 square feett) is much smaller than the average sold apartment (1,296 square feet), the multiplier is on the high side. But it's more about the trend.

Near the middle of the 20 year span?circa 2003?is where the multiplier goes big.
Despite all the volatility in housing and rental prices since 2008, the multiplier has remained remarkably consistent (and elevated) for 3 years despite experiencing a global thermo-mortgage-financing meltdown with significant price and volume volatility that followed.

Why? Because the rental market has behaved a lot like the sales market.

When sales prices plummeted, so did rents. When prices rebounded a bit, so did rental prices. As a result the multiplier stayed about the same. Since the 20 year average for the multiplier was 16.1 and the 3Q 2011 was 25.4 and you believe in "reverting to the mean" then something in our market needs to give to bring the multiplier down closer to historic norms.

Possible scenarios to follow:

· The NY Jets win the Superbowl
· sales prices fall as rental prices rise
· sales prices remain stable as rental prices surge

· Matrix [matrix.millersamuel.com]
· Three Cents Worth archive [Curbed]