How does CPI miscalculate RENT, and why you should by Multi-Family NOW
Every day we are seeing articles about INFLATION and that inflation is a self-fulfilling prophecy. That is, if we think that there will be increases in prices, then we will make buying decisions based on that, and it will drive up prices. Pretty simple process.
Inflation is based on CPI (Consumer Price Index) which puts together a basket of goods and services that typical Americans use and compares them to prior periods in time. Core CPI goes one step further and EXCLUDES food and energy because they have HIGH PRICE VOLATILITY.
Rents and CPI
Where do rents come in here? Yes, rent and primary house costs are part of CPI, but they are a lagging indicator.
Rents are rising faster than what shows up in the CPI. When they measure rents, they take a representative sample of rents. Take Worcester, MA as an example. Let's say they survey rents of 1,000 people in 3BR units. Some will have leased their units 5, 4, or 3 years ago and their rents will be $1,300/month. Some will have rented this past year and have rents of $1,700. Keep in mind that more people have rents from prior to 2021, so no matter what the AVERAGE rent number is, that number is clearly lower than what the current rents are.
Evaluating Multi-Family Properties
When evaluating a multi-family property, make sure that you use what the current rents should be. Yes, there is a risk that it will take time to get the rents to market, but you will get there.
Current Rental Market Insights
A couple of good articles here on rent to read. Renters are getting squeezed since it is hard to get starter homes and first-time homebuyers are getting priced out. This makes it a great time to purchase rental properties.
Key Statistics
Percentage of household income spent on rent rising from 29.4% to 30.3%
At the beginning of the pandemic, rents went down a bit, now they are going up swiftly to try to get ahead of inflation.
3rd Quarter vacancy rate is 4.8% and rents are up 7.4%.
Moody's is forecasting rental increases of 10% for the year.
In Miami-Ft Lauderdale, households are paying 40.3% of income on rent.
Close to home in Worcester, we have specific issues as the whole housing market is changing. There are new rentals coming into the market, but they are on the top end. It is working to pull the rents of other lower properties up, like a rising tide lifting all boats. This is the opposite of what normally happens when supply is added to the market and prices decline. This is because Worcester has a 3.4% vacancy rate. So any increase in supply is quickly devoured by the market. There is also an issue in Worcester on affordability as the median income is still under $50k, so 30% of monthly gross income is only $1,250, which doesn't get you much, so a lot of folks need some form of a subsidy.
Even if there is uncertainty in the market for prices, there appears to be certainty that rents will go up. This points to multi-family real estate as a good long-term investment.
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