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Soaring Rents Understate Inflation

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28 comments on Soaring Rents Understate Inflation

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It’s no surprise in this corner as Corelogic notes Metro-Level Rent Inflation.

Last month we showed that U.S. inflation may be underestimated due to the use of a measure called owners’ equivalent rent, which makes up 30% of the core consumer price index. When the CoreLogic single-family rent index is used as an alternative measure for price changes in owner-occupied housing, we saw core inflation increasing by one-to-two percentage points faster than what was reported from April to July of 2021. [Mish Note: 30% is an error it’s 24%]

The CoreLogic single-family rent index is also available for more than 100 metro areas, which can be used to compute metro-level inflation measures. Let’s look at two metro areas from the Southwest U.S. that illustrate how inflation appears to be underestimated and delayed in the core CPI.

Population growth in Phoenix, Arizona has been amongst the highest in the country, leading to rent increases.

Rents in Phoenix have been growing the fastest of the metro areas covered by the CoreLogic single-family rent index for the past two years. Phoenix single-family rents increased 19% in July 2021, more than double the national rate. However, the owners’ equivalent rent measure used in the core CPI grew by just 5%.

Houston Rents Far outpace OER

In the case of Houston, Texas the CoreLogic single-family rent index increased 9% for July, compared with 1% for the owners’ equivalent rent. These measures can be compared for a longer time period in Houston, and we can see that not only is single-family rent growth more variable than the owners’ equivalent rent, but it also experiences turning points sooner.

These numbers are not surprising in the least. I have been complaining about OER for years.

Not only does OER lag rent, but it brutally lags actual housing prices. 

As noted previously OER is a mythical price that one would pay to rent one’s own house from oneself, unfurnished and without utilities. 

CPI Year-Over-Year

The BLS released CPI data for September on Wednesday. 

CPI Details 

  • The CPI is up 5.4% year-over-year.
  • OER is up 2.9% year-over-year.
  • Rent is 2.4% year-over-year.

For further discussion, please see Consumer Prices Rise Another 0.4% a Bit More Than Economists Expected.

Real Interest Rates Hit New Record Low as Home Prices Hit New Record High

On September 28, I commented Real Interest Rates Hit New Record Low as Home Prices Hit New Record High

Case-Shiller home prices hit a new year-over-year high in July. Correspondingly, real interest rates hit a new low for the series. The latest home price data is as of July. 

The BLS does not count home prices as a consumer expense. It used to. But now it calls home prices a “capital expense”. 

Until 2000 it did not matter. Rent, OER, and home prices all moved in tandem.

Now they don’t.

Key Points (as of July Case-Shiller Data)

  • The National home price index rose 19.7% from a year ago setting a new record for the series, easily beating the housing bubble max increase of 14.5%.
  • The 10-city metro average rose 19.16% from a year ago but still under the housing bubble peak of 20.5%.
  • According to the BLS, rent was only up 1.91% from a year ago.
  • Owners’ Equivalent Rent (OER), the mythical price one would pay to rent one’s own home from oneself, unfurnished and without utilities, was allegedly up a mere 2.43% year-over-year.
  • The CPI for July was up 5.37% from a year ago.

It’s Inflation Stupid!

OK home prices are a capital expense. So what?

Inflation matters, not just alleged consumer inflation.

CS National, Top 10 Metro ,CPI, OER Percent Change 

Home prices are up 19.7% from a year ago, national average.

If we substitute Case-Shiller home prices for OER in the CPI here are the results.

Inflation Measures

  • CS National: 8.82%
  • CS 10-City Metro: 8.69
  • CPI: 5.37%

As of July, I pegged inflation at 8.82% vs the CPI at 5.37%.

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Mike Shedlock

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28 Comments
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conservativeprof
conservativeprof
4 years ago
The increase in rents and housing prices will lead to major labor unrest. Entry level workers got a major boost partially from pandemic and government policies leading to an artificial shortage (at least partially). Labor across industries has watched the wage increases of entry level workers. The combination of rent/housing price increases and wage increases of entry level workers will lead to major labor unrest in the coming 6 to 12 months. Companies will find demands impossible to resist except perhaps through offshoring. The Biden administration will strongly support labor unrest. Companies with renewed pricing power will pass on higher prices to consumers. A potential ugly inflation spiral stoppable only by a major recession.
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Jojo
Jojo
4 years ago
You dump free money in people’s pockets, they will spend most (all) of it, which will raise prices in general across the board from products to services.
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Eddie_T
Eddie_T
4 years ago
Anybody ever try to write anything about inflation in the cost of financial services? Because it’s a thing.
I finally closed on my four loans yesterday. Four houses in which I had lots of equity, well over 50%. Smallish balances of $110K-$160K.
The front end costs of various fees to the mortgage loan company, the appraiser, the title company and the attorneys were roughly in the $5k range, almost double what it was 5 years ago, the last time I borrowed mortgage money. Those are the non-deductible costs that have to be recovered over time. 
To that, add higher up-front escrows for taxes and insurance, in the $6K-7K range, which are recoverable costs that still increase the starting principal if you wrap them into the new loan. The principal on all four new loans is $10K-$12K higher than the pay-offs on the old loans.
This means the payback time for the non-expensible items is going to be just over 4 years on average. My preliminary math before I closed, based on costs I was expecting….was less than 2 years. Surprise!
Three of these loans were already well into amortization…over five years since inception. Now they’re back to 30 years. So it adds years on the back end. 
All this, just to lower my payments by roughly $100 a month on average. The only other positive I can think of….is that my interest tax deductions will be higher since the loan amortizations got reset. Also not a huge bonus, but something.
The rule of thumb that is preached in every article I ever read is that it’s worth doing a refi if you can reduce your interest rate by a full point. From now on,  my rule of thumb will now be TWO points. If I had it to do over again I would have only refinanced one of these four properties, because the payback on the other three is just too far out in the future to matter that much in a world where equity is going up so fast. Not worth the trouble.
Of course, over 30 years, the 100/month payment savings will add up to $36K times four….. $144K…..And the dollars I’m paying then will be worth far less than today’s dollars……..so in the very long run the math works out fine. But in the very long run I’m going to be dead.
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Doug78
Doug78
4 years ago
Reply to  Eddie_T
I guess that unless you are presented with an offer you can’t refuse you probably won’t be buying anymore real estate for a while if I read your post correctly. The interest rate may be low but the when you add up the additional fees the true rate is higher so effectively interest rates have risen.
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Eddie_T
Eddie_T
4 years ago
Reply to  Doug78
I don’t like the idea of owning RE in markets other than the one I live in and understand. And I’m not interested (at least not yet) in doing 1031 exchanges into DST partnerships, because I don’t like being a junior partner with no say in anything…and I don’t like the outlook for most commercial RE, anyway.
I can’t make my math work for local residential RE right now….so yes, you are right. I still might buy a lot on the coast for my own enjoyment and as an experiment in AirBnB…but that wouldn’t really be a true investment, because it might be a few years before it flowed cash….more of a luxury. I have however been lucky with RE that I bought solely for my own use….and I need one more property to get to 10…lol.
As far as I can see from here, the oil stocks I’m trying to accumulate are poised now to make more money over the medium term that a new rental would make. 
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Eddie_T
Eddie_T
4 years ago
Reply to  Eddie_T
Realist must be on vacation, or very busy with his charity work. Let me give the weekly energy update.
My new portfolio, begun with a single buy of PSX on 9-21-21 now contains 16 oil company stocks, 2 renewable energy stocks, and one carbon credit ETF.
The portfolio is up 8.23% as of yesterday’s close, with every single pick green. Oil companies are leading the pack with gains of double digits in 7 of my picks. My number one, PSX, is up 27.5% in three weeks. Not too shabby for a stock that reliably pays out 4% or better.
Renewables and CC’s are lagging, but I expect them to do just as good or better when oil isn’t in such an uptrend.
I am not trading at all……the plan is just to grow the positions and re-invest the dividends. I have a modest windfall coming from taxes I overpaid in the pandemic, and I am hoping for a stock market correction, which would just let me back up the truck on my picks. My goal is to 10X all my starter positions.
Realist looks for 3-4 more good years for this strategy, and I tend to agree. My best case would be a forever hold on this one, with a lot of equity gains in the short to medium term and decent dividends after that….dividends that might pay my bills in retirement.
This is a real switch for me philosophically. Since 2008 I have only traded, believing that long term buy-and-hold was dead as a doornail. But the math looks good to me on these energy companies, and they stand to profit big from climate change policies, something most people find counter-intuitive.
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Doug78
Doug78
4 years ago
Reply to  Eddie_T
OIl, gas and nuclear have futures now. Renewables I am not so sure. 
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Eddie_T
Eddie_T
4 years ago
Reply to  Doug78
The renewables I own are paying out great dividends now and making good gains. I only own the best of the best, which are (imho) CWEN and OGE.
The lines between oil and gas and renewables is already becoming blurred as the oil companies pivot and renewables profit from cheaper capital. I look for the lines to become so blurred that they will all just be ENERGY. 
So far I am staying out of nukes and uranium, although your French electricity giant pick is on my watchlist.
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Doug78
Doug78
4 years ago
Reply to  Eddie_T
That company has a bunch of renewables in it too. They might spin off that part and quote it at the right time.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Somewhat OT:
The problem with America’s semi-rich

America’s upper-middle class works more, optimizes their kids, and is miserable.

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Doug78
Doug78
4 years ago
Reply to  Casual_Observer2020

They are ambitious people and the
problem with ambition is that after one goal is reached another is just ahead.
It does bring unhappiness to some and perhaps many but on the other hand having
money does bring security to you and your family. 

 

What is the alternative? The lower
classes have just as much stress if not more and anyone who has worked in third
world countries knows that for the people there finding their next meal is a
constant never-ending obsession. It is only in developed countries where you
can find groups of people being able to live low-stress lives principally
because we as a society are wealthy enough to furnish enough free stuff so that
the unambitious can survive very nicely. By historical metrics that has never
been possible. Only a unique convergence of high industrialization, high safety
nets and widespread peace allows this to persist but as we have seen what has
happened to other countries recently all of that can be taken away in a short
period of time due to factors beyond one’s control.

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Eddie_T
Eddie_T
4 years ago
Reply to  Casual_Observer2020
Just an attack on meritocracy, by some journalist who is himself punching uphill at people who have done better for their families than he thinks is a good thing for society as a whole.
Because he wants people to be angrier about inequality, instead of paddling harder to keep their heads above water in a world where costs are always going up.
Good luck on convincing anybody with this argument. 
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whirlaway
whirlaway
4 years ago
Reply to  Eddie_T
Well, the studies are there to prove it.   

https://www.cnbc.com/2014/03/31/the-other-wealth-gapthe-1-vs-the-001.html  –> 

It is the top 0.01% that want the rest of the top 1% to be angry at the poor and the middle-class.   And I’d say that they have done a good job of it.     As the saying goes – “Super-rich people pay Fox people to get the merely rich people to blame the really poor people”.   
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Eddie_T
Eddie_T
4 years ago
Reply to  whirlaway
I’d say the tutoring and the enrichment was well worth it. I give you my kids for four great examples. 
And you either claw your way up in this world or you lose ground. I know which one I prefer out of those two.
The article is suggesting a false dichotomy in my view. What should moderately successful Americans do? Vote for Bernie Sanders and AOC, who are just going to take a little more off our plates to pay for their bread and circuses? How incredibly stupid.
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whirlaway
whirlaway
4 years ago
Reply to  Eddie_T
You are entitled to your opinions.  I just presented factual evidence.  You might not like it, but it is what it is.
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Eddie_T
Eddie_T
4 years ago
Reply to  whirlaway
The evidence you presented is rather obvious to anybody in the group we’re discussing. I am well aware that (a) wealth inequality is getting worse and is heavily skewed toward those at the very top…and (b) that it is increasingly difficult for people who work for a living to make it into the ultra-high net worth group.
That’s the story of my life, my friend. I am acutely aware of it.
I just choose to use what talents the universe gave me to try to do the best I can with what I have to work with…..and I don’t buy the arguments of lefty journalists who might wish the world to be different than it is. 
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Tony Bennett
Tony Bennett
4 years ago
Welcome to the October https://www.apartmentlist.com/ National Rent Report. Our national index increased by 2.1 percent from August to September. Although month-over-month growth has slowed slightly from its July peak, rents are still growing much faster than the pre-pandemic trend. Since January of this year, the national median rent has increased by a staggering 16.4 percent. To put that in context, rent growth from January to September averaged just 3.4 percent in the pre-pandemic years from 2017-2019.
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conservativeprof
conservativeprof
4 years ago
Reply to  Tony Bennett
To really inflate rent and housing prices, let’s dramatically increase immigration. Looks like 5M per year with this administration. Let’s go B. 
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Tony Bennett
Tony Bennett
4 years ago
The rent situation exacerbated by the rent moratorium for many.
How many took the opportunity to pay no / partial rent for year plus?  Now that moratorium  over those renters have choice of paying going rate monthly +  rent in arrear … or get evicted.
I just don’t see many (if any) landlords willing to let a year+ rent forgiven without some sort of restitution.
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Since2008
Since2008
4 years ago
Excellent post Mish. Thank you
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KidHorn
KidHorn
4 years ago
I’ve said it before an I’ll say it again. BLS does not attempt to accurately calculate inflation. Their goal is to produce an inflation number low enough so as not to cause civil unrest. There are many COLAs tied to the CPI, including social security. And if inflation were calculated accurately, pensions and SS would go bust. I’m actually surprised that the SS COLA went up by over 5% this year. I guess 5% is what they think will prevent riots.
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Jojo
Jojo
4 years ago
Reply to  KidHorn
It probably should have gone up 9-10% but like you said, 5.9% was what they thought they could get away without causing unrest.
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RonJ
RonJ
4 years ago
“Population growth in Phoenix, Arizona has been amongst the highest in the country, leading to rent increases.”
Considering how HOT Phoenix is in the summer, it seems odd that population would be growing there, climate change alarmism and all. Also, what affect on rents are the illegal aliens piling into the country going to have, considering they have to live somewhere?
Governor Newsom just eliminated single family zoning, so that home owners can build a rental in the back yard, or single family homes can be turned into low rise apartment buildings, over the objections of local communities. There may be a ballot measure coming up to attempt to overturn that.
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KidHorn
KidHorn
4 years ago
Reply to  RonJ
The primary effect of global warming is raising overnight lows near the poles. Which doesn’t seem so bad IMO. Places like Phoenix will see very little of it. Some morons think it’s going to cause daytime highs to hit 110 in Miami.
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Jojo
Jojo
4 years ago
Reply to  RonJ
It wasn’t just Newsom that eliminated single-family neighborhoods.  The whole Dem legislature was in on this also.  My local politicians all voted for SB 9/10 to the dismay of many single-family home owners.
The next election is a good chance for SERIOUS Republicans or Independent politicians to reduce the Dem supermajority that currently exists in CA.
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Doug78
Doug78
4 years ago
Supply chain disruptions and inflation are just “high class problems”, are they not?
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Karlmarx
Karlmarx
4 years ago
C’mon Man!  
Nobody has to pay rent anymore
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RonJ
RonJ
4 years ago
Reply to  Karlmarx
Klaus Schwab wants no one to own, anymore. You will own nothing and be happy. Utopia.
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