The Relationship between Home Prices and Rent Amounts

It is widely accepted that rent amounts are a fundamental factor in determining the value of housing. If housing prices rise too far out of line with rents, a combination of declines in home values and increases in rent amounts will ultimately occur and enable these two averages to correct back toward each other. Although this relationship between housing values and rents has endured the many peaks and valleys of past real estate cycles, the events of the years from 1996 to 2006 strained this interconnection to unprecedented extents. However, just as gravity causes objects to eventually fall to the earth, subsequent years have shown that this correlation between housing prices and rent is destined to survive.

An examination of Freddie Mac’s conventional mortgage house price index reveals that United States home prices doubled from 1996 to 2006. Alternatively, the consumer price index shows that rent amounts only increased half as much as sales prices over the same period of time. This created an identifiable imbalance in this typically synchronized relationship, which then served as a reliable predictor of the paths that both home values and rental amounts would follow in the years to come.

As if imitating a cinema production featuring two lovers involuntarily forced apart, the years of 2007 and 2008 set the scene for housing prices and rents to once again be reunited. Nationwide housing values tumbled by approximately 35% in these two years according to the market tracking company MDA DataQuick. Responding on cue, the real estate research firm RealFacts Inc. reported that rents increased by approximately 10% over the same period.

It may seem illogical that rents could actually increase amidst falling home prices and the economic downturn that usually accompanies a poor housing market. Yet it is actually a poor economic environment that often acts to stimulate the residential rental market. For example, the decline of economic conditions from 2007 through 2008 brought the construction of new housing and apartments to a virtual halt, thereby stunting the supply of available rental property. Simultaneously, the demand for rentals was enhanced by a dramatic increase in the size of the available tenant base. Families displaced from foreclosed properties, growing populations, potential buyers refraining from purchasing until home prices stabilize, difficulties in obtaining financing, and widespread job losses all contributed to make renting a very attractive option for large segments of the population.

As evidenced above, housing prices and rents remained interconnected despite the intense pressures that pulled them apart. Although often overlooked, this durable relationship should be utilized to help predict housing market conditions and prevent the occurrence of economic crises well into the future.

Brian S. Icenhower, Esq., BS, JD, CRB, CRS, ABR, a California Association of Realtors Director, practicing real estate attorney, a real estate expert witness and litigation consultant, a prosecution consultant of Tulare County District Attorney Real Estate Fraud. He may be contacted at bicenhower@icenhowerrealestate.com, or www.icenhowerrealestate.com