A Tweet on rents, and a video discussion between Danielle DiMartino Booth and Jim Bianco, both shown below, highlights the debate over inflation, rate cuts and the Fed. 
Rent vs OER Chart Notes
- OER stands for Owners’ Equivalent Rent. It is the price one would pay to rent their own house, unfurnished without rent.
- Rent of primary residence is just what one would expect. It is measured price of rent, unfurnished, without utilities.
Mass Confusion Over OER
Contrary to widespread myth, OER is a measured price with very minor imputations that do not matter. OER is designed to track rent prices and it does. It is a measured price.
Much of the confusion comes from a misquoted BLS statement on OER, emphasis mine.
The expenditure weight in the CPI market basket for OER is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
Note that these responses are not used in estimating price change for the shelter categories, only the weight.
People quote that question as if that is how the BLS measures prices. It doesn’t. Prices, except for minor, irrelevant imputations, are based on actual measured rents.
The problem with OER is the weight not the measure. An even bigger problem is no one actually pays OER. Rather, people pay mortgages.
That is the backdrop for this Tweet and my rebuttal that follows.
Hoot of the Day
“Mish keeps telling me rents are going up.”
Well, they have been. Deepak referred to Resiclub. Here are some Resiclub links.
- November 8, 2023: America’s largest single-family landlord keeps raising rents America’s largest single-family landlord, which reports a +6.0% increase in average single-family rent between Q3 2022 and Q3 2023. While this growth is slightly down from the +9.9% increase observed in the previous 12-month period (between Q3 2021 and Q3 2022), it remains elevated above pre-pandemic levels. Comparatively, between Q3 2018 and Q3 2019, Invitation Homes reported a +4.4% rise in average rent prices.
- February 11, 2024: Charting the changes in apartment vs. single-family rents across top U.S. metros National multifamily rents rose +2.7% in 2023, while national single-family rents rose +4.6%.
The problem I have with Resiclub is I have no idea what they are measuring. The reports are subscription only.
We do know there is a huge problem with Zillow and Apartment list measures. The latter shows rents are declining. They aren’t. Apartment List does not seasonally adjust and the data is new tenant leases only.
New tenant leases are only about 9 percent of leases. And very little of that is in the fourth quarter or first quarter. But on the basis of new leases we see reports that rents are falling.
Is OER Poorly Constructed?
OER very closely tracks rent which it should do. If rents drop, so will OER because contrary to popular myth it is based on actual rents.
OER is well constructed but poorly implemented.
The problem is no one pays OER! They pay mortgages. So on that basis people want to take it out of the CPI.
The Fed and economists ignore housing prices because they are a capital expense. But if the Fed bothered to look at housing prices instead of OER, it would not have done baby step hikes in 2006.
Inflation Matters, Not Just Consumer
I keep repeating, to deaf ears, so I will now scream Inflation Matters not just consumer inflation. If the Fed leaned against asset bubbles in 2006 and 2017 on, we would not be where we are.
If the Fed cuts interest rates where do home prices go? The stock market? What about the wealth impact?
OK rent lags. Since OER tracks rent (As It Should) OER lags too.
But what about the lag impacts of Bidenomics? Of massive union contract wages? Of the strain of immigration on health care services and costs.
The whole focus on lags, is in one direction only.
One-Sided Spotlight On Lags
We no longer have global wage arbitrage. We no longer have global outsourcing. We no longer have just in time manufacturing.
Instead, we have massive wage increases in union wage contracts, a massive wave of boomer retirements, increased need for health care services, and massive immigration that is pressuring both housing and health needs.
Denver Health at “Critical Point”
On January 24,2024, I noted Denver Health at “Critical Point” as 8,000 Migrants Make 20,000 Emergency Visits
The Denver hospital system is turning away local residents because it is flooded with migrant visits.
Eight-thousand migrants from Central America accounted for approximately 20,000 visits in 2023. Denver Health asked the Federal Emergency Management Agency to provide funds for immigrants’ medical costs. The state and federal governments aren’t reimbursing the hospital, which spent $136 million for patients who didn’t pay.
Another Hotter Than Expected CPI Led by Shelter
For the 29th consecutive month rent was up at least 0.4 percent. Shelter, a broader category, rose 0.6 percent. Food rose 0.4 percent.
For discussion, please see Another Hotter Than Expected CPI Led by Shelter, Up Another 0.6 Percent
OK, rent lags. But tell that to the person who has now seen rent rise for 29 consecutive (smoothed) months.
Tell that to the person trying to buy a house at all time highs.
Now what happens to home prices if the Fed cuts rates now?
And take another look at the lead chart. Rent did not fall in the Great Recession, nor did it rent fall in the short Covid recession. It was not until May of 2010 did year-over-year hit zero.
Some of that was a lag impact, but it was also do to a home price crash. Yet, here we are predicting declines in rent without an accompanying crash in anything.
The Fed Impact
That is the bubble the Fed created with interest rate policy.
But No! Let’s not call that inflation. Let’s call that an egg salad sandwich and claim “Truflation” is 1.5% or whatever based on one-sided lags.
Danielle DiMartino Booth vs Jim Bianco
Jim Bianco and Danielle DiMartino Booth had an excellent debate on inflation.
Booth believes inflation is about to crash. Bianco is in the no landing camp.
Congrats to Natalie Brunell for an excellent interview.
Who’s Right?
Both of them but on different things. But what’s the timing? None of us really knows.
Who will be president? All three of us prefer “none of the above”. But how do we get there?
For now, I think Bianco has the better side of the inflation debate. But, I don’t buy his no landing (no recession) thesis. To date, however, Bianco has been more right than anyone else.
I side with Booth on employment numbers and a recession.
Due to the impact of retiring boomers and a need to fill many of those jobs, I don’t see a huge rise in unemployment. That’s been my position, correctly so for years.
Also, I don’t see significant declines in rent. We did not see rent declines in the Great Recession housing crash. Siding with Jim, I see a lot of pent up inflation pressures.
Everything is not in one basket or the other. And the Fed is in an impossible situation right now. If it cuts based on “Truflation” how big will the bubbles get?
Agreeing with Danielle again, I expect the economy is going to hit a great big brick wall, but not necessarily a huge deflationary one.
The concern both see, and I am in that camp as well, is another Fed + Congressional overreaction with the deficits we have now would be highly inflationary.
What About Bitcoin?
Near the 59 minute mark, Bianco says “The spot Bitcoin ETF is an admission of failure. You are sucking crypto into the current system. The whole damn place is run by a bunch of dgens, which is what Danielle was talking about, dgen being a degenerate gamblers.”
Violent Agreement?
In some ways, the three of us are in violent agreement, but in others there is a big difference on timing, the nature of lags, and the likelihood of a recession.
What’s Really Going on With Rent? Five Measures to Compare
Returning to the topic that started this post, please see What’s Really Going on With Rent? Five Measures to Compare
And to put a spotlight on a basic agreement with Danielle, please see Tapped Out Consumers? Retail Sales Unexpectedly Take a Big Dive
This economy is not as strong as many seem to believe.
I do not buy either the soft landing or no landing theory. I expect a sudden brick wall. If correct, the timing may very well determine the election.
Great discussion with Bianco and Booth. This is the kind of post that makes Mish’s columns a must read.
First of all, these numbers are complete BS on Rents and especially OER.
ANYONE who believes RENTS didn’t go DOWN during and especially After the Financial Crisis / Great Recession is absolutely full of crap.
“And take another look at the lead chart. Rent did not fall in the Great Recession, nor did it rent fall in the short Covid recession. It was not until May of 2010 did year-over-year hit zero.”
BULLShite.
There were MILLIONS of people living in Forclosed, Foreclosing or about to be foreclosed on homes, Condos, Townhomes and other SFR-like dwellings. That often lasted for years or at least many months.
Landlords in many / most cities were left with decreased rents, vacancies, etc. There were MILLIONS of homes, Condos, etc. that were Vacant or had squatters for at least some significant period of time
Many landlords lost properties to foreclosure because of these issues.
(Not just people who were overextended but individual landlords who had been in the business for a decade or more in dozens of metropolitan areas around the country.) partially because of “Shadow Inventory” of Condos, subdivisions, recently finished homes that couldn’t be sold. etc.
Fortunately we owned / invested in Larger Multi-Family apartment Buildings…which were affordable so they had less vacancy (but still more than before the debacle) and “Rent Concessions” we’re definitely in high use.
but almost anyone who owned SFH, Condos, townhomes etc. felt the hit.
Rents were DOWN dramatically throughout much of the country. Very few metro areas did not get hit.
So I don’t care what that chart says, when we know millions of people lost their (main) jobs over several years and / or had to take on crappy jobs or string together several part time gigs.
Rents were definitely impacted and anyone who owned numerous rental properties should be able to validate that.
(Yes, there’s ALWAYS an exception but of the Metro Areas we know, Atlanta, Chicago, Houston, Vegas, Phoenix, 5 cities in FLA, etc. absolutely Rents were DOWN during that time period.
Any well connected Real Estate Investor (or Rental / Sales Agent / Broker) can back that up.
How many MILLIONS of Short Sales, Foreclosures, Forbearance and other related Mortgage restructurings happened?!?!
This is a bogus measuring system if ANYONE claims rents didn’t go South during that time.
Besides the inflation factors of on-shoring, retirement, loss of productivity, and broken supply chains, there is the large and looming specter of debt deflation. Some thing that money printing (inflation) can counter act and offset debt deflation. However, this is a fallacy. Both inflation and debt deflation make people poorer. Money printing is just another government cost shifting program that accelerates the impoverishment of the masses while sparing their bankster buddies of their sins.
Private banks create ex-nihilo through loan deposits than the qas private-public Federal Reserve.
Well, in order to tame inflation, we need to attach “FART LINES” to the assholes of Cows while being milked and to any animal that farts (yes, POLITICIANS) and pump those fumes into vast underground Storage facilities.
Then, use those fumes to create POWER (turning huge Generating Equipment).
If I were KING, I would also exempt any Politicians from being pumped out and instead, they would be required to PLUG their assholes and then WE WOULD GET TO USE IGNITERS to explode the biggest farters, including Schumer, McConnell, Biden, Pelosi, etc.
THEY WOULD BE FILMED when they are exploded and it would be PAY PER VIEW broadcast and that money alone will reduce the Deficit.
HOW’S THAT for a plan?
…”unfurnished without rent.”
unfurnished without UTILITIES. – – right, Mish?
Anybody remember the 70’s? It’s possible to have persistent inflation and recession. The county I grew up in had 25% unemployment along with high prices. Thankfully, I was elsewhere.
Yes, I was renting in the early 70’s. 6-pack of Beer: 69 cents.
RENT: $45 (1/2 with roomie in college)…
FOOD: CHEAP! A round Steak for “Bell Pepper Steam with Rice” was a buck and rice was 10 pounds for $2 in SF.
IT WAS CHEAP to live in the 70’s.
The big one was FUEL for my gas guzzlers (1962 Chevy, Small Block 283, 9 miles per gallon), a 1966 Old Toronado (455 cu in, 7 mpg)…fuel was a huge outlay for me…I was in College and in my early Silicon Valley days (Got hired by Apple, turned it down)…Mini-Computer Co. gave me a raise to stay…).
The 70’s were wonderful. Low inflation in reality.
Is More Inflation On the Way?
It has to be, because in the end, everything must balance out. With what was printed, spent, and still printing and being spent,
This dogs going to be mean when it comes home, looking to be fed!
The Walton’s come to mind (not the Wal-Mart variety).
Multi-generational family residents would be the future, but with Divorce Rates being so high, homelessness on the city streets is the future.
What I can not understand, is the continual high end apartments that are being built. Why not build low end apartments with no swimming pool, gym, clubhouse perks?
Because Developers just need to get the hight end places leased up (even with Rent Discounts / Incentives) and SELL them to Long Term Buy & Hold companies / Funds / Asset Managers, who use tons of Cash / Equity to purchase them. The Asset Managers then Re-Fi eventually when rates are good.
When you’re building NEW…you want your property to be the most attractive to New Tenants (move out of older properties) that have great jobs.
Anyone that doesn’t understand the effects of wages/pay rising faster than the associated productivity should not be allowed to manage any money.
bingo
That would be most of those in government today. Who is going to tell us when we are richer, and way richer? Nobody says we are broke, ever!
Inflation causes depression. Everyone except bankers, politicians, and college trained economists knows this immutable historical fact.
Accelerating the inflation as if to outrun the depression it causes assures social collapse.
Today’s system has the pedal nailed to the floor.
Inflation does NOT “automagically” = Depression.
There’s normal business cycles with short recessions and longer growth periods. Automation counteracts inflation, Technology can counteract inflation, lots of ways that inflation gets back to normal. The Fed just needs to stop slamming on brakes…then slamming on the accelerator…then slamming on the brakes…etc. etc.
re: “It was not until May of 2010 did year-over-year hit zero”
Money flows turned negative in 2010, along with the CPI. If the trend continues, long-term money flows will drop below zero in the last half of 2024. Then the FED will cut rates.
But no one should expect rent to follow suit given the FED’s payment of interest on interbank demand deposits. You can blame that on Volcker:
Paul Volcker was quoted in the WSJ in 1983 that the Fed: “as a matter of principle favors payment of interest on all reserve balances” … “on rounds of equity”. [sic]
Definitely agree on Bianco’s take on Bitcoin. Great post Mish!!!!!
Trump was hit with a $355M fine and barred from doing business in NY : liquidation sales. How much u want to sell your penthouse : 100M. How much do u want to rent it for : 1M/month (OER). Can u get it : ??
Only idiots quote Truflation. Economy wide, rent inflation matters more, because it pushes up wages — a lot.
Yes, more inflation is on the way even if it subsides during “transitory” periods over the next few years. People think AI will solve everything but never bother to question how much energy will be required to be fully AI.
https://www.scientificamerican.com/article/the-ai-boom-could-use-a-shocking-amount-of-electricity/
85.4 terawatts will be needed just for AI servers through 2027. That’s more than small countries produce and that’s just for AI, forget about the EVs and normal increase in usage due to population growth.
Oh and there won’t be enough electricians to wire it all up. “According to the National Electrical Contractors Association (NECA), “7,000 new electricians join the industry each year, but 10,000 retire from it,” putting the number of skilled electricians available at a severe deficit.”
So guess what will happen when AI use grows? Demand for electricity will grow and so will the cost and electricity is an input into everything.
I have no doubt people will be blaming immigrants for the extra electricity usage as that’s the go to scapegoat for everything these days.
It’s turtles all the way down and inflation all the way up!™
But will they use more electricity than the Crypto currency miners use? /s
It’s not the turtles I’m worried about.
It’s not being sure of the elephant’s footing.
Is inflation anything like inflammation?
Is there an anti-inflatory?
Tesla installing giant presses allowing assembly of main car body from three pieces eliminating multiple robots from the production line. What is your example?
a farmer can be far more productive with a tractor but there is no free lunch. In order for the farmer to get the tractor a whole supply chain ecosystem needs to exist. Someone needs to mine the metals, design and build the tractor then provide the fuel to run the tractor. A farmer can get rid of 10 farm hands with a tractor but 100 people are needed to provide the tractor.
For AI, I’ve already noted the increase use in electricity but there is a whole new supply chain ecosystem needed. This video talks about how the current network infrastructure is too SLOW for AI and the entire network system needs to be redesigned and upgraded.
https://www.youtube.com/watch?v=fb69FyW2KLk
It doesn’t stop there, politicians are concerned about AI deep fakes and misuse so expect a whole new set of laws that people will be trained on. There will be a whole new “ecosystem” that will required of hundreds of newly trained people in this field.
As for the magic AI can do…ChatGPT has a ‘Finance Wizard’ now that can predict the future price of stocks. I asked it to predict the future price of SPY and gave me $505 to $510 in the short term. Am I trading on this information? no, but I am keeping notes and testing and checking because someday AI will probably be running my portfolio.
in the news is a new videoGPT called Sora that can create video clips with a word prompt…amazing.
A farmer can get rid of 10 farm hands with a tractor but 100 people are needed to provide the tractor.
Fortunately for the tractor manufacturer et al. most of the 100 can be in China or the equivalent.
“A farmer can get rid of 10 farm hands with a tractor but 100 people are needed to provide the tractor.”
The tractor makers sell to more than one farmer.
“Inflation is always and everywhere a monetary phenomenon.” Milton Friedman.
Measuring inflation by auguring the entrails of a goat is pointless. Only need to measure the expansion of the money supply and you know inflation.
I was expecting someone would comment on ZeroHedge live debate: The fate of the US dollar. One of the useful feats ZeroHedge managed to muster . At about 2 hour mark, Jim Rickards keeps droning on about how ZIRP didn’t create any inflation, and only fiscal spigot led to inflation.
I wonder what century does he live in. ZIRP created massive inflation in assets. That it didn’t effect the Chinese product CPI, is disingenuous.
https://www.youtube.com/watch?v=LSVVFbk1gy4&t=1910s
Rickards has been droning since the early 2000’s, that I am aware of.
Of course, I came in late.
Thanks for the quote. The Fed is happy with asset inflation but not consumer inflation which riles up the masses. That’s why policy is what it is. Asset inflation helps keep tax revenue high. Just ask Gavin Newsom.
All these discussions expose one obvious truth: this is not real inflation in the classical sense. Inflation is supposed to be a ‘general’ rise in prices. Instead here we are bickering on a handful of items that make up most of the measured inflation. So it should be obvious that this is not a ‘monetary’ inflation but a structural one. And yet, economists do the only thing they know how to do and keep treating this inflation as a demand driven , monetary one. This will result in more damaging monetary policy, no real solution to the rent and healthcare inflation (both due to concentrated monopolistic pricing power and structural scarcity). It is no wonder most Fed operations end up in a deep recession and financial collapse.