Read It Here First: Owners’ Equivalent Rent and Inflation

Over the weekend, we discussed  the various "shills and montebanks are coming out of the woodwork to proclaim — once again — that there is no inflation, due to OER."

Today’s WSJ looks at that exact issue, and to Justin Lahart’s credit, avoids the trap:

"In other words, a hot housing market perversely depressed official inflation measures, and now a cooling housing market is pushing those measures up. Some bond investors are prepared to dismiss the statistical gymnastics. But Barclays economist Dean Maki says that would be a mistake. Price figures are simply getting back to normal after being unnaturally low for a long time, he says.

"It would be somewhat disingenuous for policymakers to strip out owners’ equivalent rent now, when they weren’t stripping it out before when it was keeping core inflation low," he says."

Disingenuous is certainly the right word for it, and kudos to Dean Maki for recognizing that.

Incidentally, the OER still understates inflation, as the chart at right reveals. 

In related news, after the third consecutive weak monthly LEI, the Conference Board has announced yet another change to the leading indicators. The latest adjustment? Any item showing a negative number on a given month will be multiplied by "minus one" to change the coefficeint to a positive number. A spokesman announced that "this will help keep the LEIs  as completely useless as possible."


Gimme Shelter
Justin Lahart   
WSJ, May 22, 2006; Page C1

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What's been said:

Discussions found on the web:
  1. B commented on May 22

    I guess since the Fed raising short term rates has caused equivalent rents to rise, the Fed should start lowering rates to stop inflation if we are using equivalent rates to measure it.

    Raising short term rates causes people to rent because housing becomes even more unaffordable which puts even more downward pressure on the economy. That causes more demand for rentals and as we know rising demand causes higher prices. So, we should expect that as long as the Fed continues to raise rates, we will see inflation increase as measured by equivalent rents. So, then when does it stop? When no one can afford a house or afford to rent because both have exceeded the tipping point. So, we can expect the Fed to stop when we see people living under the highway bypass. ie, According to this measure, only when the Fed has totally killed the consumer and driven us into a deep recession.

    Just call me Mr. Shill.

  2. Lord commented on May 22

    Disingenuous, yes, but that doesn’t mean they can’t justify it on the basis of more accurate measurement or won’t do it. Rationalization can be very powerful.

  3. spencer commented on May 22

    Over the long run rent and home prices should move roughly the same as both are generally functions of the same things — income, land prices, construction cost — and that has generally been true with first one leading and then the other leading.

    But over the past deade the CPI home owners rent has risen at a 3% rate while my favorite measure of home prices –the HPI repeat sales index– has risen at a 7% rate.

    It is catch-up time.

  4. JoshK commented on May 22

    I think credit to being first may go to “Calculated Risk”, but who’s counting. It’ll be interesting to see how a 25% increase in rent would wack CPI and what kind of Fed response it would force.

  5. KirkH commented on May 22

    In housing bubble zones like San Diego where half of the population consists nearly unemployed RE Agents and mortgage brokers there is no way rent is going up unless they convert all the parks into homeless shelters.

    I suspect rents will come down even in the face of inflation as the economy softens which means the rent to home price ratio will get even more out of whack. Home price reversion to mean is going to be absofrikenlutely brutal.

  6. yc32 commented on May 22

    There is no question that inflation is real now. The more important question is whether inflation will be contained six months from now due to the fed action so far, or whether the inflation expectation will get out of control. Inflation is real now. Future inflation though may be in control.

    Fed action has significant lag effect on economy, while stock market tries to look ahead. Therefore, it is hard to bet either way on economy. Economy will more likely to slow. Recession though is unlikely unless Fed does too much. I don’t think Fed is or should emphasize current inflation number too much when deciding their policy. Barry, your thoughts?

  7. alan commented on May 22

    I live in San Francisco and my rent went up 10% this year. It is still much cheaper for me to rent than own, by a long shot. I need a raise, a higher paying job or much lower housing prices if the same thing happens next year.

  8. David Silb commented on May 22

    I don’t about you all but I am sure looking for that sign that says:

    “This way to the Egress”

    I really think it is going to get rough going forward.

  9. algernon commented on May 22

    Spencer expresses it well & succinctly.

  10. jab commented on May 22

    The market came back today on the surface but the internals still look awful. I shorted a little into the end of the strength.

  11. mlong commented on May 22

    You’re giddy with vindication!!

  12. wcw commented on May 23

    Alan, did you move? San Francisco is rent-controlled, but California is a vacancy-decontrol state as of 1996. If you didn’t move, your allowable rent increase for 3/06-2/07 is 1.7%. If you didn’t move, don’t live in a single-family detached or in a condo, and don’t live in a building built since 1979, your landlord is screwing you.

    Either way, you should probably move. You don’t want to rent from someone who breaks the law just to make a few extra bucks from his tenants, and your comment makes it seem you would prefer rent control if it turns out your unit is exempt.

    The rental market in SF is still pretty loose, though there are hints of firming since we moved back last summer. Rents are still below their peak during the worst of the bubble, so start looking at Craiglist and check with the rent board that you’re not moving someplace exempted.

  13. alan commented on May 23

    Thanks for the info. I had not seen the rent control page you linked. I do live in a building built since 1979, so my landlord is exempt. I plan on moving if I don’t get a sufficient raise or better paying job to compensate for the increase in rent. I’m thinking that if rents and house prices continue to go up, it would be best for me to join the ongoing exodus and contribute to San Francisco’s 4% decline, since 2000, in population.

    Thanks again for the information, and good luck to you in SF.

  14. JM commented on May 29

    are we inflating or reflating then ?

  15. Monica commented on Oct 31

    His little sister Augusta, who was much younger than himself, and he was,besides, to learn taylor rain his lesson at the same time; but these two things would not do together at all. There sat the poor little fellow, with his sister on his lap.

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