Potential Bubble Markets

[Nick Gerli]

Income growth is an important factor in determining rent growth. The two exhibit a fairly strong long-term relationship, shown by the graph below.

But if rents are growing faster than incomes (blue dots in below), that could be a sign that a market is detaching a bit from fundamentals. And potentially heading into bubble territory. 

Take Las Vegas, for instance - rents have grown by nearly 40% from 2009-19 while incomes have only grown by 15% in the same span. How about Phoenix? 50% rent growth v. 30% income. 

On the other end of the spectrum - Pittsburgh. Rents have only gone up by 19% compared to 35% income growth. 

Would you be cautious investing in those blue dot markets? Would you want to be in the green dot markets instead, where incomes have grown faster than rents? Or are there other variables that need to be considered?

[Bill B.]

So you’re recommending people buy in areas with low rent growth? I’d rather buy in an area with high rent growth with the fear that growth might stagnate than to buy in an area and expect low rent growth. Are you also recommending buying only in areas with low appreciation?

Are you remembering to factor zero income tax and 1/2 the property taxes into these calculations? Are you cherry picking start and end dates for rent growth?

Ps. 40% rent growth in 10 years is almost zero. (4% per year) But 19% in 10 years, less than 2%, is less than inflation, those people are losing money. You cant tell me property taxes, insurance, and maintenance didn’t go up more than 2% per year over the last 10 years in Pittsburgh. If the houses cost the same 10 years later they are getting killed. If the prices have gone up at all they should have moved to a better market  years ago.