Posts filed under “Real Estate”

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:


Source: Northern Trust, New Home Inventory 1965-2005



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


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%."


What Happens if Inflation Is Overstated?
NYT, June 9, 2006

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

Category: Data Analysis, Economy, Federal Reserve, Inflation, Markets, Real Estate

Housing Slowdown Continues Apace

Category: Real Estate

Recent Housing Data: Charts & Analysis

Category: Economy, Federal Reserve, Investing, Real Estate

Wal-Mart and the Buck

Category: Commodities, Economy, Energy, Inflation, Real Estate, Retail

Read It Here First: Owners’ Equivalent Rent and Inflation

Category: Economy, Federal Reserve, Financial Press, Inflation, Real Estate


Category: Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation, Psychology, Real Estate

Hypocrites, Inflation, Housing

Category: Commodities, Inflation, Psychology, Real Estate

What if Housing Hare Becomes a Tortoise?

Category: Commodities, Markets, Psychology, Real Estate

The Fed’s New Conundrum: Slowing Housing

Category: Federal Reserve, Inflation, Investing, Markets, Real Estate

Existing Home Sales Data (California Real Estate: On Sale!)

Sales of existing homes surprised to the upside yesterday. But one data point does not make a trend. This is the first rise (sequential monthly change) after 5 straight months of falling Home Sales. And that’s before we examine the data.

Before you declare the end of the housing slow down, consider:

- Existing Home sales actually slipped vs. last year by -0.7%; The reported gain was over last month’s data;

- the Inventory of unsold homes soared 7 percent in March, hittting an all-time record; There are now 3.19 million existing homes for sale, or  5.5 months’ supply; That’s the largest inventory since July 1998

- Existing homes edged up 0.3% last month to a seasonally adjusted annual rate of
6.92 million units; (we know that seasonally adjusted data is not always accurate)

- Year over year, the Northeast and Midwest gained, while the previously hot housing markets in the South and the West slipped;

- median home prices are still rising, albeit nmore slowly — up 7.4% year over year, to $218,000.

Here’s a data point that has me scratching my head:  Why are there different numbers for the year-over-year changes for seasonally and not seasonally adjusted?  Was this March somehow in a different season than last year’s March? I am perplexed.

Note that data for existing home sales comes from National Association of Realtors, a group that is certainly an interested party; Of course, as a homeowner, investor, and someone with a public bearish tilt for the second half, I’m hardly objective myself (hey, I try). But this oddity — down -0.5% for the not seasonally adjusted year over year versus down -0.7% for the seasonally adjusted year over year — is beyond my comprehension.

So much for the hard data on existing sales; Today, we get New Home Sales. Recall our prior admonishments that monthly New Home Sales Data are unreliable; look instead to a moving average.

Let’s move onto some anecdotal evidence.  A friend writes:

"Flop! Wow, KB running blue light specials in California. Not surprising,
Chico area was rated one of the most overvalued markets in the country. Houses
in the $200k space.  When was the last time you saw that in California? "

Oak Knoll Place Live Oak, CA

Oak Knoll Place Slideshow

Here’s the sales pitch:

"Oak Knoll Place in Live Oak is located in a beautiful
community near the majestic Sutter Buttes. With easy access to Highway 99, it is
ideally located for easy access to Sacramento, Lake Tahoe, Reno and a wide
variety of recreational opportunities. Yuba City and Marysville are
approximately 10 minutes south, Chico is approximately 35 miles north and the
Gray Lodge Wildlife area is approximately 10 minutes west. Live Oak has a
quaint, small-town atmosphere with many nearby recreational water activities,
including the Feather River, Yuba River and Sacramento River. Prices starting
from the High $200′s.

I don’t know Live Oak, but houses like that in California are hard to imgaine . . .

More after the jump.

Existing-Home Sales Rise Again in March
WASHINGTON (April 25, 2006)

Existing Home Sales  data


Read More

Category: Data Analysis, Federal Reserve, Fixed Income/Interest Rates, Real Estate