Smokies home prices: How far could they fall?

[Collin Hays]

I was on the phone with an owner yesterday who is contemplating selling, but will need to bring at least $150,000 to closing, due to the fact that their property is currently worth somewhat less than what they paid in 2022.  

Why are vacation rentals prices so much more volatile than residential properties?  Simply put, vacation rentals are investments, and their prices tend to be a certain multiple of annual earnings (rents).  It's really no different than trading a stock.  For example, Caterpillar is currently trading at around $350 per share.  Is that expensive?  Not really. It is trading at around 15 times annual earnings, and has traded at that multiple for many years.  The "15" is the Price-to-earnings ratio, or "P/E".

But that doesn't mean the stock price doesn't move.  If Caterpillar's earnings are off 10 percent this year over last year, the stock price will have to move down about 10 percent to reflect the 15X multiple.  If their earnings jump 10 percent, the stock price will likely rise 10 percent, again, reflecting a 15X multiple.

In 2020-22, we saw vacation rental earnings skyrocket from their norms - some 2 or 3 times what they did in 2019, and the sales prices followed suit and went up by 2 or 3 times.  In 2024, we are seeing rents return nearer to 2019 numbers.  Thus, home prices will have to reset to levels that are a realistic multiple of this year's earnings.  

If you're in a ditch with your Gatlinburg-area vacation rental, I've been there.  Shoot me a PM; let's set up a time to talk.