Squeezed Out of House and Home

-edited

I compared apartment prices as determined by the Rent Cafe to shelter indexes in the CPI.

On October 19, I noted the National Average Rent Declined for the First Time in Two Years.

Key Findings

  • The national average rent went up by 3.2% in the past year but dipped by 0.1% month-over-month, reaching $1,471 in September according to data from Yardi Matrix.
  • Apartment rates in a majority of small and large cities registered either minor decreases or stagnated.
  • In more than half of the nation’s largest renter hubs rent prices waned since August.

Year-Over-Year Rent Cafe

I thought it might be instructive to compare Rent Cafe to the CPI measures, Owners Equivalent Rent, and Rent of Primary Residence.

The Rent Cafe provided me with a year-over-year spreadsheet and I downloaded the CPI data from Fred, the St. Louis Fed data repository.

The numbers are not directly comparable because they measure different things. But the exercise does show apartment prices are far more volatile.

Comparison

OER: Owner's Equivalent Rent is rental of houses or Condos assuming one rented ones’ house from himself as bizarre as that sounds. Here is the actual question: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

Rent of Primary Residence: Rent of primary residence measures non-owner occupied unfurnished apartments and houses without utilities.

National Average Rent: National rent is a weighted average of apartment rental prices. According to the Rent Cafe "We don’t make any distinction between furnished and unfurnished apartments or units with utilities included/not included. The share of furnished apartments or ones with utilities included is quite small."

Volatility

Apartment rental prices are far more volatile than the cost of "renting one's house from oneself", the largest weight in the entire CPI.

Some will likely use this information to suggest buying a house is a good idea.

It might be if houses were not so damn expensive.

National Average Rent vs Hourly Earnings

Hourly earnings are from the BLS production and supervisory workers series and the all BLS workers series.

Housing Bubble Reblown

The Last Chance for a Good Price Was 7 Years Ago.

Pick Your Squeeze

  • Renting a Home: Increases in National Average Rent have generally outpaced year-over year hourly earnings since 2011.
  • Buying a House: House prices have risen far faster than earnings since 2012.

Compared to the price of rent or the price of buying a home, real wages have been in decline since 2011 or 2012.

Squeeze is On

Healthcare? Let's not go there if you buy your own insurance.

Mike "Mish" Shedlock

Comments (46)
Mish
Mish

Editor

year over year that is correct - bubble reblown

Country Bob
Country Bob

The costs of owning a home -- as measured by the statistics in the post -- do not include property taxes, whereas the rental stats have property tax costs "built in".

And I doubt the ownership costs reflect maintenance costs either. In many locales, a homeowner has to hire three different repair men to get one thing fixed... the first guy doesn't fix it, the second guy kinda does something, and after three tries the problem gets fixed. The government statistics include the cost of hiring one fixit man, but not the total cost of getting the problem fixed which is three times higher.

In some places, like my previous residence in a major urban area, the cost of housing was out of control and repair men were forced to live hours away (bad traffic and tolls, not distance). That meant it was tough to get a repair guy at any price; they wouldn't show up unless it was a "big job" that justified the time on the road. Perfectly understandable from the repair guy's point of view, but incredibly frustrating for a homeowner.

A lot of big rental companies have full time repair people on staff. Old school repair guys have bought houses to rent out (rentals are their retirement fund) but they fix their own properties only.

For everyone else, home ownership costs need to include buying new even when the item could be repaired if only there was a qualified repair guy available.

Country Bob
Country Bob

Mish: "Squeeze is On ... Healthcare? Let's not go there if you buy your own insurance.

Obamacare is an epic disaster, forcing demand up and supply down with an IRS enforced insurance scam. Its time to democrats to admit that Obama is a racist thug who's signature legislation was a fraud.

Health care reform is still needed, and the payment system before Obamacare had serious problems before Obama made things worse.... but step one is admitting that the US government does not and cannot control costs on military spending, postal services, farm aid, education spending, or health care. Even if governments in other countries supposedly can (with oil royalties doing the heavy lifting!) -- the US government is not able.

Walmart, Costco and CVS each have various low cost health clinic initiatives underway. All three have long standing reputations for bringing costs down, whereas Uncle Sam has a track record of inflating costs.

Many mid-sized employers are hiring concierge doctors and nurse practitioners to come in once or twice per week to their place of business and provide primary care. Its many multiples cheaper than hospital or granting time off to fight traffic to get to a doctor's office. Adding a huge layer of bureaucracy, enforced by the IRS, only adds to costs.

I don't know if Walmart et al will prove successful, and companies hiring concierge doctors may be a short term work around... but the ideas might work. An entity like Uncle Sam, known for buying $40,000 coffee makers, is not able to control costs. So other spending -- from new cars to home ownership -- will suffer as income gets diverted to prop up a failed political system.

We elected Trump because the alternative was much much worse, and in 2020 the alternatives are all 3rd world socialists.

Six000mileyear
Six000mileyear

Mish's chart shows a bubble, but the chart does not include units of homes sold. While prices are reblown, volume is nowhere close to new highs. This is a non-confirmation of the housing index gains. Prior to the housing bubble, the national home ownership rate was about 40%. Even after the housing market crash, home ownership is still around 60%; therefore, there is still a lot of bubble to deflate before a true buying opportunity arrives.

Casual_Observer
Casual_Observer

I see more people sacrificing 401k and other savings for buying a home. People have been convinced a home is a necessity. Its neither a necessity nor a good investment.

Sechel
Sechel

Not sure about the rest of the country but where I am officials are using home owners as a piggy bank for out of control spending with real estate taxes going up way beyond the rate of inflation. Sure they'll justify it based on increases in home valuations but this adds to the cost of carry and increases in home prices cannot easily or practically be monetized short of selling the home.

Rents are more a function of market. Common charges, maintenance and of course taxes are not market set and simply go up. Where I am the city passed a law raising the minimum wage substantially which impacted carrying costs .

numike
numike

The Happy, Healthy Capitalists of Switzerland

Forget Scandinavia. Switzerland is richer and yet has a surprisingly equal wealth distribution. https://www.nytimes.com/2019/11/02/opinion/sunday/switzerland-capitalism-wealth.html

Blurtman
Blurtman

The Fed causes homelessness.

nothingbutblueskies
nothingbutblueskies

Rent prices have doubled in Seattle since 2009. Great job Fed!

Freebees2me
Freebees2me

These remarks are intended to be general and longer-term (local market conditions will always vary).

US consumers have operated on the prevailing wisdom home ownership always leads to wealth creation for them. (There are obviously exceptions on both the upside and downside with timing playing a key role.) But, I believe that this paradigm is in the midst of changing and changing hard.

We are seeing a new paradigm emerge. One that says buying a home is to be viewed like buying any depreciating asset, which, in fact, it is. There are lot of different causes, but principally it's demographic.

This will have two important effects:

  1. People will cut their current income spending because they won't be able to draw any mental comfort from home wealth creation.

  2. Homeowners (i.e., sellers) will have to plan around selling their homes (and will need to cut their spending even more in order to have greater savings). For home sellers, gone are the days of going to a closing and getting a big, fat check. Sellers will need to bring money to the closing (or simply walk away from the cost of whatever 'improvements' the sellers made to the home).

I've witnessed it first-hand. I have had the good fortune to live in several very affluent areas in the USA. Home prices in these areas are now falling and falling hard. People who have done million dollar plus improvements to their homes (e.g., pools, landscaping, interior finishes, etc.) are get absolutely ZERO financial benefit when they sell. In many cases, these sellers (or higher priced homes) are lucky to even sell for what they brought the house for. They're walking away from very expensive improvements.

astroboy
astroboy

How much does it actually cost to build a house? Let's forgot about the lot. I paid $675 for my three bedroom no garage no basement in suburban DC. My sister bought a six bedroom on an acre lot, pool, huge trees (rare in Texas), three car garage for well under half that price. As I assume the contractor made a decent profit or he'd be out of business.

Ted R
Ted R

Another way to view this topic is to understand that this is the result of the Federal Reserve desperately trying to inflate the economy and thus prevent deflation. Hence we now have all these horrible bubbles in our economy. It is just that simple.