Posts filed under “Data Analysis”

What Happens if Inflation Is Overstated?

The NYT’s Floyd Norris jumps the gun on CPI and Owner’s Equivalent Rent this morning:

Norris_oer_1"Since 1983, the government has measured the price of homes not by looking at house prices but by computing what it calls "owner’s imputed rent." That is the rental value of the house you own. It accounts for nearly a quarter of the entire Consumer Price Index.

When the change was made, the government provided statistics indicating that previous inflation rates would not have been very different under the new method, and that remained true until 1996.

Since then the home price index maintained by the Office of Federal Housing Enterprise Oversight has doubled, while the imputed rent figure has risen by less than a third.

Had the government computed the Consumer Price Index using actual home prices since 1996, I estimate that it would have risen by an average of 4.1 percent a year, as opposed to the 2.5 percent reported. The core rate — inflation excluding food and energy costs — would be 4.2 percent, not 2.2 percent.

Perhaps the Federal Reserve was too hesitant to raise rates, and thus allowed speculative bubbles to form, because it was seeing inflation through rose-tinted glasses.

But now the problem could be the opposite. If the housing boom is ending, rental costs may start to catch up with house prices. The reported inflation rate would be higher than the real rate, at least to people who say the best way to measure home prices is by measuring home prices."  (emphasis added)

Here’s the problem with this approach: After years of CPI definitively understating Inflation, we are now at a junction where its a slim possibility that — off in the future — when CPI may (repeat MAY) possibly overstate inflation. 

For that to happen, rents would have to tick up significantly. With OER about a third of the core CPI, medium size increases in rent beyond the historic trend would have an impact on BLS reported inflation data. 

Think about this for a moment: In order for that to happen, we would needs a fairly hefty shift in demand for rental properties nationwide – beyond the available supply. We have yet to see any evidence of this shift; Given the massive buildup in inventory recently, there is still much more than enough supply to meet demand.

Indeed, considering all the spec properties built/bought — think of the gazillion new condos in Florida, the surge in Las Vegas, Arizona, San Diego — lots of rookie Real Estate speculators may soon find themselves as unwilling landlords. This will especially be true for those who are unable to sell their properties beause they cannot sell for less than their (interest only) mortgages. If they cannot absorb the big hit, their only option is RENT IT.   

To summarize:

1) Inflation has been significantly understated by the BLS for the past 10 years due to OER;

2) With the Real Estate boom cooling, the possibility exists for an upswing in rentals sometime in the future;

3) If that occurs in significant enough numbers, that might in the future, overstate inflation;

4) However, before that happens, all the excess inventory built recently would need to be absorbed into the Real Estate market.

5) All this presumes the economy doesn’t slow all that much if at all;

Coming Soon: New Rental Property Supply:

Home_inventory

Source: Northern Trust, New Home Inventory 1965-2005

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Conclusion:

Don’t look for OER to overstate inflation anytime soon . . .

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UPDATE JUNE 10, 2006 6:27am

The WSJ reports "It’s no longer a renter’s market" as rental prices rise 3%:

"For years, rents have been flat or falling in cities nationwide — a result of the booming home-sales market, which transformed scores of renters into owners. But as the housing market cools, rentals are once again in demand, liberating landlords in many markets to raise rents at the fastest pace in years. They’re also cutting back on the goodies that previously helped lure tenants, such as a free month’s rent or a free DVD player.

While renters have had an easy ride for years, the current bout of rent increases could prove to be a jolt for many Americans, from seniors looking to downsize to recent grads looking for their own place. Average effective rents — or what tenants pay after taking concessions into account — are expected to rise 3% this year, according to Reis Inc., a real-estate research firm. Rents began picking up last year after several years of softness. As recently as 2002, rents fell 1%."

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Source:
What Happens if Inflation Is Overstated?
FLOYD NORRIS
NYT, June 9, 2006
http://select.nytimes.com/2006/06/09/business/09norris.html

Rising Rents Jolt Tenants
Cooling Housing Market Adds To Demand in Many Cities;
RUTH SIMON
WSJ June 10, 2006; Page B1

http://online.wsj.com/article/SB114988701424976450.html

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Stephen Moore Gets Slick With the Data

Early this morning, I caught a few minutes of Stephen Moore’s Supply Side arguments on CNBC re Tax Cuts.

Rather than discuss what some have called Economic’s biggest mistake, and what the Chairman of President Bush Council of Economic Advisors Greg Mankiw described in the third edition of his book Principles of Economics textbook as the work of
"charlatans and cranks," I thought I would simply debunk his Capital Gains Tax Cut argument as increasing treasury receipts:

Moore is arguing that since tax reciepts went up after the Capital Gains Taxes were cut in 2003, it should therefore get all the credit. I would respond simply by going to the charts, and pointing out that THE ABSENCE OF CAPITAL GAINS FROM 2000-20003 is the primary reason.

This first chart shows the pre-tax cut period of October 2000 to March 2003; Gee, anyone want to hazard a guess for why Capital Gains Taxes paid were so low after the Nasdaq dropped 78%?

How about NO CAPITAL GAINS = NO CAPITAL GAINS TAXES!

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 Nasdaq 2000-03

200003_nazz

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The second chart shows what happened after the War began in March ’03. Note that the Nasdaq selloff was very similar in depth to the initial 1929 crash.

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Nasdaq 2003-06

2003_06_nazz

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Gee, when markets rally, people pay more Capital Gains! Go figure . . .

(And this is before we even mention increased Housing sales due to half century low interest rates and the potential capital gains taxes there) 

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