An appraiser finds a three-year-old sale of a rental house at a monthly gross rent multiplier of 240. Market data show that prices of similar houses have risen about 15% since then, while rents have risen about 3%. What is the best treatment of this multiplier in valuing a similar house today?
Correct Answer
D) Give it less weight, since prices outran rents and 240 likely understates today’s multiple.
A multiplier is comparable evidence only under similar market conditions. Here prices rose much faster than rents, so a current multiple would be higher, roughly 240 × 1.15 ÷ 1.03 = 268, and the older figure likely understates it. Prices and rents are expected to move in the same direction, but that does not mean at the same rate. Lowering the multiplier reverses the effect, and trending by rent alone leaves the result at the old multiplier.
Why This Is the Correct Answer
Option D is correct because multipliers should come from sales under similar market conditions, and these conditions have changed. Prices rose about 15% and rents about 3%, so the ratio rose to roughly 240 × 1.15 ÷ 1.03 = 268. The 240 figure therefore likely understates the current multiple and deserves less weight.
Why the Other Options Are Wrong
Option A: Apply 240 as extracted, since prices and rents answer to the same market influences.
Option A relies on the idea that prices and rents share market influences. They may move in the same direction, but here they moved at very different rates, 15% against 3%, so 240 would not reflect today's relationship.
Option B: Lower it below 240, since rising rents reduce the price paid for each dollar of rent.
Option B moves the multiplier the wrong way. Prices grew faster than rents, so price per dollar of rent went up, roughly 240 × 1.15 ÷ 1.03 = 268, not down.
Option C: Apply 240 to the rent of three years ago, then raise the result by the 3% rent change.
Option C raises the old rent by 3% and keeps 240, which is the same as applying 240 to today's rent. It ignores the 15% price change, which would imply a multiple of roughly 268.
Ratio Moves With the Gap
If prices grow faster than rents, the multiplier rises; if rents grow faster than prices, it falls.
How to use: Use this rule to reason about whether an older multiplier is likely to be high or low today.
Exam Tip
Ask whether the top or the bottom of a ratio has grown faster. That tells you which way an old multiplier is likely to be off.
Common Mistakes to Avoid
- -Assuming a multiplier stays constant through changing market conditions
- -Treating movement in the same direction as movement at the same rate
- -Thinking higher rents alone must lower the multiplier
Concept Deep Dive
Analysis
A multiplier is a ratio, so it stays stable only if the price and the rent move together. The issue is what happens when they do not. Since the numerator grew faster than the denominator, the multiple has probably risen, which weakens the older sale as evidence of current conditions.
Background Knowledge
Income multiplier analysis rests on the idea that prices and gross income respond to the same market forces. Comparability still includes similar market conditions at the time of sale, so older multipliers should be tested against current evidence.
Real-World Application
In a market where house prices have climbed faster than rents, an appraiser finds only one older rental sale. The appraiser gives it little weight, explains why current multiples are probably higher, and looks for more recent evidence.
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