This is a vexing question for millions of Americans. There was a time when most people had a reasonably good idea of what they could sell a property for.  There were enough purchases and sales to create comps. Not any longer. Homes that have been foreclosed on come to the market at distressed prices. This is happening in every neighborhood across the country. When one property sells at a distressed price it influences all the properties around it.

 

So what is residential real estate worth today? The answer to that question is, “About 15 times the annual rent”.

 

RE professionals are going to write me and say that this simple calculation is wrong. They will say that the number is lower. Possibly as low as 12 times rent. They might be right. However in areas of the country that I watch the 15 times rent number is a pretty good indication of value.

 

Based on this calculation the following rent/price guidelines can be determined:

 

 

HOME PRICE	MONTHLY RENTAL
$200,000	$1,100
$350,000	$1,950
$500,000	$2,800
$750,000	$4,200
$1,000,000	$5,600
$2,000,000	$11,000

 

 

It is still difficult for a homeowner to make a reasonable estimate on what the rental value of a property will be. But I have found that most people have a better handle on this number than they do on what their home can be successfully marketed for.  There are regional considerations for rental values, by and large this formula works well for metro versus rural properties as a valuation tool.

 

This analysis creates a tremendous problem. There are very few homes for sale at 15 times rent. The only ones that come up for sale in that price range are those that are in foreclosure and are being sold by bank lenders. We know that there is demand for properties when those conditions are met. That has been proven in just about every area of the country.

 

In my view the bulk of unsold homes on the market today are trying to get sold at a multiple of rent that is at least 20 times. That is why these homes are not selling. The implication is that on balance RE is still 25% overvalued. The bad news is that rental values are dropping across the country as homeowners are forced to rent properties that can’t be sold.

 

I would be interested to get comments on this. I would like to hear from people around the country if they thought this pricing mechanism was in the ballpark for their area. I would be particularly interested to get comments from folks who live outside the US to get a look on how that stacks up as well.

 

If my sense of this is correct we are in for a very rude awakening. Those with $1MM+ homes will be particularly depressed by this calculation. My sense is that high end RE is in the process of a massive correction. The sheet rock palaces that were built with cheap money from 2002 to 2006 are worth half of what was paid for them. We just haven’t figured that out yet. The impact on consumption will be very significant when that reality sets in.

 

A back of the envelope analysis of the rental values of American homes produces a capitalized value of $9 trillion at 15 times rent. The mortgages on these same homes is equal to $12 trillion. We are missing $3 trillion in value based on this. That might be a decent estimate on how much the RE mess going to cost us.