Average home valuations in the Dallas-Fort Worth area were up nearly 20% from mid-2020 to mid-2021. But have rents increased?
The short answer is yes, and quite a bit more than you might think.
Based on our automated valuation of market rents for 2+ million single family homes in the metroplex, market rents spiked 13.2% for the metro area over the same time period. This increase was uneven across neighborhoods and areas.
Rents increased the most in suburban areas further out of town, such as between the 121 Tollway and US-380, where where rents surged 19% or more. This area includes the cities of McKinney and Frisco.
As a real estate investor, have you priced your rents accordingly if you are trying to fill a unit?
Where rents surged the most
Faster rental growth in the suburbs is likely a reflection of the huge demand for units in suburban locations during the pandemic period.
We break this down to the individual block level. Areas in green experienced the strongest rental surge, and most of them are north of the 121 Tollway. A few pockets of the city experienced almost no rental growth.
Are rents keeping up with price appreciation?
Only partially. In most cases, rents and prices do not move at the same speed, and this has been true in the past year as well. Appreciation in the far northern suburbs clocked in at 22-27%, significantly faster than rental increases. With prices rising faster than rents, this means that you get less rent back per dollar invested than you did before.
By our calculations, at least half of homes in the Dallas-Fort Worth area appreciated by 20% or more. In a few cases, they increased by more than 30 or 40 percent. We calculated this at the individual house level.
Will this pace hold up?
We expect a slowdown in price and rental growth as the year progresses.
With the summer buying season behind us (refer to traditional seasonality), we are seeing inventory levels on both the leasing and sales markets begin to creep up. Also, with households experiencing a greater degree of movement and mobility compared to a year ago, more homes will be put onto the leasing and sales markets. We will analyze this in more detail in an upcoming article.
How do you calculate this?
Calculating rental growth or price appreciation is not a trivial task.
The usual method seen quoted in the media is to average all of the transactions that occur in an area and compare those averages over time.
However, this is subject to volatility, imprecision, and sampling bias. A neighborhood’s average figure may be skewed by a handful of ultra-expensive (or ultra-cheap) transactions at a particular moment in time.
More importantly, an area might not have enough observed transactions, or “comps” to even come up with a meaningful result.
Then, what do you do?
Formal studies of market trends use a like-sales index, which compares properties on a like-for like basis, typically over an entire metro. This requires a large sample and is best done for entire cities. The most famous example is the Case-Schiller index.
We take this one step further and calculate an estimate of rents at the house level. How?
The answer is machine learning, which solves the issue of not having enough comparables within a close distance. The valuation of a house is derived from its characteristics and its location, and the relationship between those variables. The result is a rental estimate that is better than simply taking the 3 nearest comps and averaging them.
How do you prove the calculation’s validity?
We compared the outputs of our sales valuation model and they are accurate to within 4% of actuals. For the rental estimates, they are accurate to within 5%. A certain degree of interior variation can account for differences as well, so we present these as ranges.
This innovative approach can unlock new possibilities for pricing your rental units, breaking though the limitations of the comparable approach.