Rental Prices: Up Or Down?

George Washington's picture

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cheap uggs for sale's picture

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kwvrad's picture

my 2 cents.... I feel the Japanese sacrificed the corporate greed(profit) for

the betterment of teir people, here I think they are thinking longer term and society as a whole.... wherein the U.S is strictly profit driven at any cost..with no regard to its citizens

ZerOhead's picture

Down for now and heading lower... only to rise with the coming inevitable hyperinflationary event.

Great work G.W.!

Dirtt's picture

Outstanding work.

One wonders with the level of cognizance and intelligence expressed at ZH on a daily basis how in the hell did we let the psychopaths take over.

Buck Johnson's picture

I would like to call it the CRAZY FAMILY MEMBER SYNDROME, and thats the reason why the psychopaths have taken over.  Lets say you have a family member or two (all of us have) that has "issues" and/or problems with this or that or race or gender whatever.  We do everything to keep them on some form of path because we love them and at the same time we are scared of them (a person who is unstable is dangerous).  Many times the person who finds a calling for something can become a zealot of it's teaching and will place the above issue over everything in life including rational and logical thinking.  Thats why you see people defending the undefendable, because their ideology is their whole life (race hatred, religion, free market, etc. etc. et.).

We have allowed the crazies and the zealots to have a soap box in which to spew their theories or hatreds or whatever.  And the republicans and/or democrats have stirred them up, and don't know how to control them.  The horrible thing is that these people will not only sell the rope to hang themselves with it, but will think it's a good idea from the standpoint of the person buyer of the rope.

Cyan Lite's picture

Two Words:  American Idol.

bingocat's picture

David Wyss’ (S&P economist) comments about why the US will not have a lost decade like Japan's because of Japan's declining population were a bit off-base. This is not to say that the result is wrong – just the reasoning. Japan's population started declining AFTER the lost decade was basically done with. The structural issues facing Japan during the period were different, but there are some parallels to the recent US experience. For Japan, the issues were:

  1. The entrenched and over-protective nature of Japan's bureaucracy. Japan’s enforced socialism has provided a safety net at the expense of capitalist's returns. This safety net for individuals, implemented through measures to support both individuals and institutions, has created the current “slow-moving train wreck of government debt.”

  2. The great deflationary move of the last 20 years has affected Japanese corporate margins to an extent perfectly unbelievable to those outside looking at the great corporate profit margin boom of the last twenty years in the West. Japanese profit margins peaked around 1990, and were heavily influenced by construction, real estate, and leverage. Subsequent de-leveraging on the part of the private sector caused margin contraction, and GDP contraction, and structural expectations of deflation across a wide swath of consumption patterns.
  3. The real estate overshoot (prices & lending) in the late-80s/early-90s was so huge that any return to normalcy involved significant pain. When the deemed land value of the Imperial Palace (a tract of land in central Tokyo about 2x the size of Central Park) was ‘worth’ more than the state of California (which the Japanese were buying at outlandish prices at the same time) and metropolitan Tokyo was theoretically “worth” more than all of the United States, one knew things were going to end badly at some point.  It did.

Why is any of this important for the US?

  1. The US gov’t is doing the same swap – cushioning private shock for public debt. The only way out of significant debt vs GDP is significant saving vs GDP, or significant asset price reflation (unfortunately, someone else, with money, has to buy the asset so the debtor can deleverage). The only way to make GDP grow when the net savings rate grows significantly is when that saving is applied to investment in non-deflationary capacity. There are very few markets like that, and continuing ‘mercantilist’ tendencies shown by US trading partners – in developed nations and otherwise – make this a difficult prospect.
  2. In a demand-constrained de-leveraging environment where consumption growth is supposed to be lower than GDP growth, product price deflation for high-margin consumer products is a serious risk. Margins will drop unless they are generated overseas. Read-through = significant decline in the purchasing power of a dollar and structural productivity growth as US employment does not see a V-shaped recovery.
  3. The overshoot of real estate prices and supply followed by a move to substantial deleveraging, and fall in average income growth combined to create deflationary expectations in Japan across all income brackets and all purchases. For fifteen years now, Japanese consumers have been taught by markets that prices don’t rise and have expected to have to learn to live with less. The US overshoot does not look that different, except that Japan has enjoyed a large current account surplus whereas the US starts from the opposite end of the spectrum. Banks in the US will clear their issues faster, but it will be at the expense of under-performing savings in mortgage-backed bonds, or further bailout of the mortgage market (and therefore higher public debt liability). Either way, USD-denominated savers have more to “lose” and those who lose most will be those with the savings (rich people will be taxed to pay the deficit/debt) or their savings will disappear as FNM/FRE mortgage bonds are redeemed in physical form. Everyone benefited during the great run-up (on average, everyone benefited more than they should have given the long-term averages) and everyone will be ‘de-rated’ during the fall. Read-through = long-term weaker dollar.

Long-term, there’s no way around it. The question is only whether the pain is experienced slowly or quickly. Very few students of history see the slow method as anything other than delaying the pain, but very few true students of history would actually wish for societal shock on the scale which would be involved in the quick way.

yourapostasy's picture

Read-through = long-term weaker dollar.

Weaker as compared to what? If it is compared to currencies in environments that are not demand constrained, then that would imply economies not moribund from debt loads, but with young demographies. I don't see any economies of significant size that match that description, so we're likely to see overappreciated currencies in the smaller economies that do match that description.

bingocat's picture

I cut it "short" :^)

I expect that the "weaker vs what" will be partly the BRI of BRIC and a collection of other Asian nations with both significant population, low average age, and relatively high population growth rates (Vietnam, Indonesia, Philippines, Thailand) aided by a vast swath of the world that most people ignore now but where political changes and growth has a chance to totally upset the current balance of what people expect for 2050 (the fastest growing population center (as a portion of world population) over the next 40 years will be Africa). Couple significant population growth with excellent land fertility and a startlingly low basis, and Africa will be the China of the second half of this century.
All things told, the weaker dollar would be vs what it buys, and if that means lower margin growth for US domestic companies, it means stagflation for most Americans. The resulting income gap will create socialist pressures which are visible now, and won't get any better.

Chopshop's picture

great piece, GW.  thanks for it.  important to remember the outsized weight of rent within CPI metrics and how the shelter components themselves are constructed.  yet again, is the trend and 1-3-5 year outlook inflationary or deflationary ? 

Consumer Price Indexes for Rent and Rental Equivalence

Rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence) are the two main shelter components of the Consumer Price Index (CPI). The Shelter index includes the items shown below with the relative importance of each index. The relative importance is the weight of the specific index relative to the All items index. These data are for the U.S. city average CPI for All Urban Consumers (CPI-U) as of December 2006:


Relative Importance

Shelter 32.776    Rent of primary residence 5.930    Lodging away from home 2.648    Housing at school, excluding board (2) .154

   Other lodging away from home including hotels

    and motels (3)

2.493    Owners' equivalent rent of primary residence 23.830    Tenants' and household insurance .369

The index for an aggregate, such as the Shelter index, is the weighted average of the component indexes. As a matter of fact, the Lodging away from home index is also an aggregate index, the weighted average of its two indented components (see above). Expenditures for each of these 5 components of the Shelter index are estimated directly from data reported by sampled households in the Consumer Expenditure (CE) Interview Survey. Both renters and homeowners are included in the CE sample. In fact, homeowners constitute roughly 66 percent of the CE sample in urban areas.

Rent and rental equivalence weights for index aggregation

The expenditure weight in the CPI for rent is obtained by directly asking sampled renter households the following question:

What is the rental charge to your CU for this unit including any extra charges for garage & parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?

However, the expenditure weight in the CPI for rental equivalence is obtained by directly asking sampled owner households the following question:

If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

Item Structure and Publication Changes to the Consumer Price Indexes for January 2010
the grateful unemployed's picture

and in the end they throw all that data out (read the fine print) and they make a judgement, which supports their basic thesis that there is no inflation, ergo no cola's for government workers, no TIP premium payments, and no political backlash.

It's a lot like the census, tell us all about yourself, so we may continue to avoid representing you and your interests.

and of course rents would be a lot higher, without government subsidizing renters, (section 8) as the demand would overwhelm the supply pretty quickly. according to the LA time article people are being placed in foreclosed homes, using government subsidies (sec 8). 

bottom line rental prices are falling slower (or not at all) while housing asset values are crashing, which is relative inflation.