Economists have incorrectly predicted falling rent inflation for two years. One of the reasons is housing units under construction. The other is new lease prices. Let’s discuss both.
Housing units under construction have topped 1.4 million for 25 straight months, 1.5 million for 21 months, and 1.6 million for 18 months.
And for 24 months or so, economists have been predicting an ease in rent inflations.
CPI Month-Over-Month
On September 13, I noted Consumer Price Inflation Jumps 0.6 Percent Led by Energy and Shelter
The price of gasoline rose 10.6 percent, rent another 0.5 percent, shelter, 0.3 percent, and new cars 0.3 percent leading the way for a 0.6 percent increase in the CPI in August.
The price of rent has gone up at least 0.4 percent for 25 straight months. Not to worry, Paul Krugman says this is lagging.
National Rent Price vs CPI Rent of Primary Residence
Ignore the Pundits, Don’t Expect Big Declines in the Price of Rent
Mish Flashback December 8: 2022: Ignore the Pundits, Don’t Expect Big Declines in the Price of Rent
From a CPI point of view, I don’t believe we will see rents decline even though the National Rent price from Apartment List shows that.
It’s not that their data is wrong. Rather, it has to do with what they measure.
The strong seasonal tendencies of Apartment List are smoothed over by the BLS every year. This year will be no different.
Three Key Difference to BLS
- Although Apartment List uses repeat rents of the same or similar unit and prices are are actual prices, not asking prices, it only shows new leases, not repeat leases.
- Because new leases on vacant units rise much more rapidly than existing leases, its year-over-year numbers rise or fall faster and in greater magnitude.
- The National Rent price reflects year-over-year changes, but in reality, people pay the same amount of rent for 12 months then there is one big price jump.
In addition to the cyclical nature of Apartment List, the vast majority of leases are renewals. Attempting to predict rents with these issues has been a continual mistake.
But what about housing units under construction? What happens to rent when these peaks turn down?
Housing Units Under Construction vs CPI Rent Year-Over-Year
I saw the theory that rent would collapse as soon as housing units get completed so many times that I almost started believing it myself.
The data shows no discernable correlation no matter how you shift the lead or lag times.
The chart looks totally random. So perhaps rent abate. Perhaps not. The data itself provides no reason to believe anything.
But please note the floor. Year-over-year rent has a floor of about 2 percent except in the Great Recession housing crash.
And these charts are not imputed Owner’s Equivalent Rent prices for which people pay no actual rent. These charts reflect rent of primary residence.
Well, don’t worry. That’s only 34 percent of the nation, and besides, rent is lagging.
Please note Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
The dot plot of FOMC participants is for tighter policy through all of next year.
Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
Looking to Buy a Home?
If you are looking to buy your first home and need to finance, good luck.
Please note Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
And Mortgage Rates Jump to the Highest Level in 23 Years
The longer the Fed holds rates high, the longer the housing transaction crash lasts. But cutting rates will further expand the housing bubble, asset bubbles in general. And bubbles are destabilizing.
That is the Fed’s tightrope dilemma, of its own making. The Fed is largely responsible for this housing mess.
“When Will Record Housing Units Under Construction Ease Rent Inflation?”
When “Record Housing Units Under Construction” starts to even remotely refer to a meaningful number of houses being built. In places people want to/”need to due to close to work etc” live. Of a decent standard.
Most of the new construction is in large building that are located in urban areas. But, because of the recent crime wave, people want single family homes in suburbs.
Furthermore, those large buildings are going to be filled with the millions of illegal migrants crossing the southern border.
Rent has no where to go but up. Furthermore, home prices will continue to rise.
Good stuff. Don’t fight the fed. CRE is crashing now. Residential will surely follow unless you believe this time it’s different
Exactly as the article states, the Fed has backed itself into a corner. Any move by the Fed from here, up or down in rates, leads to lower affordability.
New construction will not solve any problems since it is all quickly snapped up by investors. The only way out of this mess is tax policy changes making home ownership unattractive as an investment asset. The alternative is effectively no young worker being able to qualify to buy (or rent!) a home. Already, five in six people in California can’t afford a median priced home, and four in five in Indiana. A few days ago, an article came out that a home is unaffordable in 99% of the nation for an average American:
link to cbsnews.com
Congress needs to phase out investor tax breaks, stat, unless they want mass homelessness and Bidenville shanties.
@Mish, one chart that should also be included here are the rates of multi-generational households (e.g. more than one generation living under the same roof). I think we can expect this to continue going up. link to pewresearch.org
It is so important to identify whether we are talking about single-family or apartments. I do not believe there is a shortage of apartments, even though rents have risen. Apartments are easy enough to build in most places–if the numbers make sense.
The shortage is in single family, which in many places where people want to live, is very difficult to build in any meaningful scale. Places where job markets are strong, and singles can be built, have grown quickly.
It if the owners of single family who refuse to sell due to interest rate issues. Its single-family in the OER.
1) New homes construction is down. Construction of 5+ units is 995K.
2) Investors put their money in multi, not in private homes.
3) U don’t want to put your 1M house in the pocket of a tenant, either for 2 days on
the weekend, or for 5 years. It’s gambling.
4) The cost of fixing a house at peak market is high.
5) Baby boomers next stop is a coffin.
5) the purpose of ‘safe and effective’ campaign
The bloodbath in asset prices continues unabated, S&P 500 down 5% in last month, Gold down 6%, and long bonds down 7%. Nowhere to hide.
T-bill & chill baby. The 20 year broke 5% a few minutes ago. Choo! Choo!
Well, except the value has gone down 8% in the last month.
The ETF that tracks the USD is up. UUP
CDs
5% is not a bloodbath. Not even close. Pre-1985, that was a multiple times a year daily move.
re: “The Fed is largely responsible for this housing mess”
It is an incontrovertible fact that Bernanke single handedly caused the GFC. He drained legal reserves for 29 contiguous months turning otherwise safe assets into impaired assets. Then Bernanke remunerated interbank demand deposits, destroying the nonbanks. Bernanke bankrupt half the home builders. So, housing construction has floundered ever since. Then, QE’s “wealth effect” stoked housing prices. It was a perfect storm. Bernanke should be in prison.
I think he was blind to it, but he didn’t cause it. The thing that caused it was debt securitization. The people who approved the loans didn’t have to hold the loans. And risks were frequently hidden from investors using tranches. The GSEs also played a big role. They were pressured to buy lots of garbage. It wasn’t their money, so they didn’t care.
The boom was predicated on the belief that buyers could always sell at a higher price. When you drain reserves, you lower asset prices. That’s how Greenspan caused “Black Monday”.
From: Richard.G.Anderson@stls.frb.org
Sent: Thu 11/16/06 9:55 AM
To: Spencer
Spencer, this is an interesting idea. Since no one in the Fed tracks reserves…
As Dr. Richard G. Anderson says: “RRs are driven by payments”.
The only tool at the disposal of the monetary authorities, in a free capitalistic society, through which the volume of money can be properly controlled is legal reserves (not interest rate manipulation).
re: “The thing that caused it was debt securitization.”
The theory was in May 1980, that the primary money stock, over a protracted period, would approach M3 (via new money substitutes). The DIDMCA didn’t provide for legal reserve management. The nonbanks held more correspondent balances than required. But Greenspan accelerated the process by dropping legal reserves by 40 percent (which coincided with the start of the housing bubble).
This is how Bernanke caused the bust in housing:
2006 jan ,,,,,,, 45496 ,,,,,,, 0.04
,,,,, feb ,,,,,,, 43084 ,,,,,,, 0.01
,,,,, mar ,,,,,,, 41242 ,,,,,,, -0.02
,,,,, apr ,,,,,,, 42920 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43648 ,,,,,,, -0.02
,,,,, jun ,,,,,,, 43278 ,,,,,,, -0.01
,,,,, jul ,,,,,,, 43328 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 41162 ,,,,,,, -0.06
,,,,, sep ,,,,,,, 40865 ,,,,,,, -0.08
,,,,, oct ,,,,,,, 40088 ,,,,,,, -0.08
,,,,, nov ,,,,,,, 40543 ,,,,,,, -0.06
,,,,, dec ,,,,,,, 41461 ,,,,,,, -0.07
2007 jan ,,,,,,, 43113 ,,,,,,, -0.11
,,,,, feb ,,,,,,, 41214 ,,,,,,, -0.09
,,,,, mar ,,,,,,, 39159 ,,,,,,, -0.11
,,,,, apr ,,,,,,, 41072 ,,,,,,, -0.09
,,,,, may ,,,,,,, 42699 ,,,,,,, -0.05
,,,,, jun ,,,,,,, 42034 ,,,,,,, -0.05
,,,,, jul ,,,,,,, 41164 ,,,,,,, -0.08
,,,,, aug ,,,,,,, 39906 ,,,,,,, -0.07
,,,,, sep ,,,,,,, 40460 ,,,,,,, -0.07
,,,,, oct ,,,,,,, 40161 ,,,,,,, -0.04
,,,,, nov ,,,,,,, 40331 ,,,,,,, -0.04
,,,,, dec ,,,,,,, 41048 ,,,,,,, -0.04
2008 jan ,,,,,,, 42398 ,,,,,,, -0.07
,,,,, feb ,,,,,,, 41070 ,,,,,,, -0.05
,,,,, mar ,,,,,,, 39731 ,,,,,,, -0.04
,,,,, apr ,,,,,,, 41642 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43062 ,,,,,,, -0.01
,,,,, jun ,,,,,,, 41616 ,,,,,,, -0.04
,,,,, jul ,,,,,,, 42083 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 42055 ,,,,,,, 0.02
,,,,, sep ,,,,,,, 42456 ,,,,,,, 0.04
,,,,, oct ,,,,,,, 46930 ,,,,,,, 0.17
,,,,, nov ,,,,,,, 50363 ,,,,,,, 0.24
,,,,, dec ,,,,,,, 53723 ,,,,,,, 0.30
M1 NSA money stock (means-of-payment money) peaked on 12/27/2004 @ 1467.7. It didn’t exceed that # until 10/27/2008 @ 1514.2.
Inflation is the government policy and rent is no different. Prices are not going to go down and the more government “fixes” things the worse they will get.
If hedge funds or chinese investors want houses, we can make millions and sell them. What’s the problem?
The problem is hyper regulation of loca and federall administrations, that turns a long nightmare try to build houses.
In Canada, an extremely unpopulated country, with lots of timbers, minerals, engeneers… people are unable to build a house, the prices are skyrocketing. It was cheaper and easier to make Versailles. We are in a mad world.
Canada’s problem is that there is only a tiny sliver that’s actually liveable and so everyone is crammed into that sliver. That’s a big reason why prices are so crazy there relative to the US.
Excellent points detailing upward pressures on rent. I would add (1) the demand for an additional 100,000 plus apartments for those who would have otherwise bought homes and (2) demand for 800,000 plus apartments (many bought or subsidized by government) to house foreigners occupying US illegally).
A real confounding variable is the 23 million young adults who have taken themselves out of demand for housing by living at home with their parents. As rental prices drop, more would rent or buy. As rental prices rise, even more would move in with mom and/ or dad.
Last year Orange County Florida passed an ordinance that required landlords to give tenants notice if they intended to increase rents greater than 5%, and that notice had to happen at least 60 days prior to the increase. The objective of this was to give tenants the opportunity to shop around and potentially find a better deal before having to suddenly sign another 1 year lease or end up in the streets.
Fortunately, state elected officials stepped in and made it a state law that municipalities couldn’t create and enforce these types of anti-liberty, anti-capitalism regulations, and it was signed into law by Ron DeSantis.
You do realize that there’s always more to this story, right?
The alternative is that you end with up laws so skewed towards favoring the tenant in places like NY/CA where the landlord gets financially steamrolled.
And because of regulatory capture, it’s never the big landlords that feel the impact, it’s by and large the small landlords that get forced out.
In Florida you always have to give tenants 60 day notice of changes to the lease at renewal before the end of the lease anyway so I am not sure how this other law would have been any different.
People don’t understand the new housing model, again sticking to their 1960s playbooks where a family buys a home and lives in it for 30+ years. The family’s main competition in 1960 was perhaps another family. That’s not how modern housing works.
You still have families that want to buy a house and maybe live in it for 30 years but they now have to compete with:
1. Hedge funds that buy up homes in bulk to rent out.
2. FIRE investors that see real estate as a get-out-of-work card and usually turn them into LTR (Long term rentals).
3.Other investors that turn them into AirBnB (Short term rentals -STL).
4. Remote workers that buy second homes to escape their first home.
5. Wealthy people that own multiple homes.
I could go on but you should get the point, due some research on the types of real estate buyers and the market has changed. Cities are pushing back and banning short term rentals (New York did some major changes recently).
Now there is one other problem people don’t understand. People want to own homes in certain regions where the job market and growth are good and there is only so much housing in these areas. There is a mismatch between available houses and houses where people actually want to live. There are plenty of homes in Detroit that no one wants as well as tons of houses out in rural areas but no one wants to live there. People want to be in the city or in the suburbs next to a city because that’s where all the goods and services come from.
Personally, I love having Amazon Prime delivery stuff to my home within hours. I get delivery service from dozens of places almost within the hour. You won’t get this living in the middle of nowhere. I also love having gigabit internet to my home which is something not found in most places outside a city.
Higher interest rates are a double whammy to housing investing. Not only do monthly payments go up, bonds also become a lot more attractive relative to real estate. Better to collect interest than pay it.
I agree which is why I haven’t bought another rental property (yet). I am getting 5.5% in T-bills and I don’t need to do a damn thing but roll it over every month.
But the other side of the coin, if you can invest in properties that are growing and will have great demand, it’s possible to make long term investment decisions that pay out.
The next property I buy will likely be handed over to one of my kids anyway so they’ll own it for the next 50+ years. If it’s paid off and it can cash flow as a rental, it’s all gravy to them or they can live in it. Win-Win either way.
All that you said is true, but something that’s overlooked compared to the 60’s model you quote is:
1) Homes are vastly larger today than the 60’s. Almost twice as large so that means they cost twice as much
2) Building codes are much stricter which again drives up the price because you can’t build 60’s style homes any more than you could build 60’s style automobiles today.
Incidentally, good internet speed (250 Mbits) is available in more and more places daily and if you are really remote (say more than 20 miles outside a city) you can get Starlink which can provide close to 200 Mbits now. 200-250 is more than sufficient for the average family (I opted for 300 Fiber instead of Gig fiber because it’s half the cost and even though there are 4 of us including 2 teens constantly streaming and gaming we’d don’t ever pull 300 Mbits because I’ve checked the router stats).
The thing about the internet is that if you want to share your Netflix or other streaming accounts you need to setup a vpn service at your home so that the streaming providers all think you’re streaming from your home now that they are cracking down on password/account sharing. My kids live in different places at the moment so when they want to stream they stream thru me and you need a fat pipe for that.
I also have many computers downloading data for my investment portfolio, data, and analysis. Choo! Choo!
By the way, 20 year treasurys are at 4.986 today. I picked up more TLT. Choo! Choo!
You’re a multimillionaire and your kids need to share your Netflix and other streaming accounts? Christmas is coming up and I think I know what gift you can give them 🙂
Anyway, you don’t need a fat pipe downloading (that’s the Gig speed they always quote) if you are letting the kids VPN into your home network and stream outward. You need good upload speed to push the data out to them which is something quite different (typically that’s like 1/10 the download speed).
It cost 2x to get gigabit? It only costs me an extra $10/mo. I probably don’t need it, but the extra cost was so small, I got it just for piece of mind. I have FIOS, so they likely can handle a lot more bandwidth than others.
It wasn’t quite 2x as much but AT&T loves to bundle crap so that if you want the Gig speed you have to opt in for the extra TV channel package I didn’t want or need.
So in the end it was going to be $20-25 more a month for the Gig speed and instead I can use that to pay for Netflix etc.
Supply and demand is an immutable rule but … new construction brings things onto the market at a higher price. So this is supply that, unless owners are willing to take losses … must have a higher price than existing rentals or folks buying existing homes, finishing them up a little, and then renting.
There is no housing shortage. For 14 years (2008 – 2020) 0% money was offered by the Fed’s banks to hedge funds and private equity with rich backers/good credit, and hundreds of billions was borrowed interest free. No surprise this money was used to buy up everything in sight (houses, apartment buildings, businesses, stocks (1/2 as many as 30 years ago), bonds, etc.) to “take the country private.” There are plenty of houses — they are just now off the market as investments or being used to leverage rents and house prices up. Less supply + modest demand = higher prices. Simple.
A lot of people and businesses own multiple homes. I think the number is higher than reported. Investors are buying properties for short term rentals like Airbnb. I know several people who invested in real estate instead of the stock market and are selling or soon will be to fund their retirement. Demographics will be working against housing for the next few decades.
Investing in housing now is a terrible idea.
shouldn’t question be
when will area’s create more C type property
all new construction is A and commands higher rents
Totally agree!!!
And, I’ll add that rent inflation will subside when America decides it’s had enough of FJB’s disastrous open border policies. My Gawd, Mish, how could adding 2.5M illegals to the renters’ population not have a significant impact on rent inflation?
Oh, I forgot. You’re just like every other economist / guru who willfully ignores this serious & growing problem. Let’s talk about the data without explaining something important that’s sitting inside the data. It’s so politically correct to ignore it.
So, in addition to incrementally driving up rents, open borders massively increase the available quantity of drugs & leads to incremental increases in crime.
And, the hilarious point is that OPEN BORDERS are the new national debt crisis. Everyone thinks that ignoring it will make the issue go away. ROTFLMAO!
Plenty of space at the Chicago Botanical Gardens, north $hore; suburban Chicago.
“My Gawd, Mish, how could adding 2.5M illegals to the renters’ population not have a significant impact on rent inflation?”
Sorry for the confusion. Obviously, those in the KNOW do realize I was talking about an annual rate here.
FJB will let in upwards of 10M illegals in his disastrous 4 years in office. And the disgraceful McCarthy and all his UnitParty cronies are complicit.
GO MATT GAETZ!