According to CoreLogic, most areas in the US show balance between price gains, cap rate drops and net revenue increases.
What Affects Cap Rates?
With home prices skyrocketing +20% this past year, according to the CoreLogic national Home Price Index, and rents on single-family homes jumping up +13%, according to CoreLogic’s Single-Family Rent Index, are homes overvalued?
Price growth that outpaces rent gains over a long period of time may signal that a property is overvalued if the property’s cap (capitalization) rate has remained constant. (A cap rate is measured by dividing a property’s net operating income (NOI) from its property asset value.)
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Factors that affect cap rates include long-term interest rates, the riskiness of real estate investment and tax code changes. The factor that has changed the most over the past two decades is long-term interest rates. As a result, cap rates for single-family rental homes dropped by nearly -20% over the last decade and by almost -50% over the last two decades.
Cap Rates Down -20% over Last Decade
Both single-family and multifamily rental units have seen cap rates fall about -20% over the last decade.
When using rent increases adjusted for inflation in lieu of net operating income growth, it appears that single-family home prices in most US metros were anchored in economic fundamentals.
CoreLogic data indicates that most metros had price growth consistent with cap rate and net operating income changes. Take a look:
Metro Areas Ratio: 20-year HPI Growth to Expected Growth
Los Angeles 1.6
Anaheim, Austin, Jacksonville,
New York, Phoenix, San Diego, 1.3
Houston, Raleigh 1.2
Virginia Beach 1.1
Nassau-Suffolk, Warren 1.0
Los Angeles and Seattle, according to CoreLogic, may be outliers here. These two metros have seen price gains over the last 20 years that may have exceeded what was expected given the decline in cap rates and changes in net rental income.
- Most metro areas in the US have seen price growth exceed rent gains.
- Price gains exceeding rent growth may indicate overvaluation if cap rates remain the same.
- Cap rates are nearly -20% lower than they were 10 years ago and almost -50% lower than they were 20 years ago.
- CoreLogic believes that price gains are generally consistent with estimates of net revenue increases and cap rate drops in most places within the US.
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Thanks to CoreLogic.