I'm having a little trouble wrapping my mind around this one. The CS index includes all loans (including those above the conforming limits) the OFHEO does not. (Thats actually kind of a question but I'm pretty damn sure.)
But as you showed the other day the lower end of the scale had a much more rapid rise in price. Wouldnt more of that rapid rise in price be deflating from the OFHEO index now?
Do you think the fact that the CS has fallen faster is more attributed to more coastal properties and no midwest?
On a side note do you (or anyone else) know if the OFHEO now includes loans that adhere to increase in the conforming limits? That might make the OFHEO even better and closer to the CS
Anecdotally, rents are decreasing a bit in the Los Angeles area. Don't see much possibility of a nationwide increase with the economy perched on the edge of a chasm.
Just wanna add this to the mix (again) as it did fit into the flavor of the days:
Robert Bach, Senior VP & Chief Economist, Grubb & Ellis TOPIC: Commercial Real Estate: The Next Shoe to Drop?
For apartments, the increase in the renter pool resulting from rising residential foreclosures will be offset by an increase in shadow supply (unsold condos and foreclosed houses being offered for rent). The economic recovery, when it comes, could be shallow, however.
PROGRAM RECAP May 28, 2008 Melbourne, Florida
Please visit SpaceCoastEDC.org
Cona Glod | 07.03.08 - 2:01 am
Something tells me rents won't increase much. And, if they do (because foreclosed upon FBs are looking for dwellings), it will be temporary. Once the banks start unloading their inventory, rents will be hard pressed to rise.
Anecdotal on rents in Houston - last month moved into a townhouse inside the 610 loop from The Woodlands (eliminated a ~35 mile one way commute) - made an offer that was 15% below asking, told the broker after they said no to offer a two year lease and see what the counter was...ended up 7% off of asking at ~$1.00/sq ft with comps ~$1.10 - ~$1.30 from Houston Real Estate - Houston Homes, Houston Home Value and Houston Relocation (asking for the comps)
Paramax claims that, from the beginning, the UBS hedge was cosmetic. In May 2007, when the original agreement was signed, the terms were a fraction of the market rate. Also, Paramax had only $200m under management and its agreements with its own investors limited it to commit no more than $40m to any single deal. Thus, it could never compensate UBS fully for any meaningful loss in value of the $1.3bn UBS was trying to insure, it claims
It's pretty hard to imagine that rents will be affected much at all. There will be a lot more rentals and a lot more people renting, so I'd expect anecdotal and local variation in both directions but not much of a national trend.
Of course, muni regs screw these indexes up for a lot of large cities. Rent control is the bane of decent analysis.
Case Schiller suggests that half of the fall in house prices has already occurred; since I strongly suspect there is a lot more falling to be done given the foreclosure situation and the coming Alt-A issues & ARM resets, that means we could be in for a relatively serious overshoot.
CR--am I the only one that thinks it's very convoluted to think in terms of 1982=1.0, instead of the fluctuation in the ACTUAL Price to Rent ratio over time?
The actual Price/Rent chart would be much simpler to digest, and easier to grasp the magnitude of the changes.
ades, I use the OFHEO Purchase only index, but for this graph I used the overall index - because that is what the Fed economist used in 2004.
In general I think Case-Shiller is better for a number of reasons - like including non-GSE mortgaged homes.
All, if rents are flat - or even decline - then prices have to fall further by this measure. So far rents have been trending up, but that could change.
R, yeah, but that data is harder to come by, especially for individual cities - and I wanted to update the Fed paper from 2004 (using the same approach).
I think what we care about is the relative changes - and this graph shows that well.
do you (or anyone else) know if the OFHEO now includes loans that adhere to increase in the conforming limits? That might make the OFHEO even better and closer to the CS
Yes, but no.
Those observations are being reported now, but bear in mind that OFHEO's is an index based on repeat transactions of the same property. Therefore, those data points won't get baked into the index until the property changes hands or get refinanced again. So the impact will be gradual and minimal.
CR, have rents been trending up, or have OER been trending up?
I'm not certain that the method of measuring OER is accurately reflecting equivalent rent. IIRC, the government asks the homeowner what it would rent for, then averages it based on certain criteria.
In my neck of the woods in Boston, actual rents have been trending down.
his, at least, is the thrust of an essay by Lawrence Yun, the senior economist for the National Assn. of Realtors. Read the whole thing here. Highlights:
"To a great extent, we can thank steady media coverage of the real estate market correction for unfounded consumer concerns.... But theres no real correction where consumers are concerned. Yes, home price appreciation has slowed considerably, and nationally were expecting a price drop of 1% for 2007. But that drop comes at the tail end of a five-year spurt that increased home prices by 53%. We may have taken one small step back, but thats after taking 53 steps forward."
I'm going to go one further: when the housing boom was going on, actual rents increased (while OER lagged), now actual rents are apparently decreasing (while OER may be going up).
If OER is recorded in the manner I believe, then it makes more sense to do an on the ground survey of actual rents paid.
I think rents are going to FALL. That's right, fall. Energy and food prices will continue to tap into disposable income, and the debt burden of consumers will start to cut into what they can afford to pay for housing. Anecdotally I'm hearing lots of stories about additional months of free rent, and an incredible inventory of condos are beginning to flood the market in many major cities. I'm putting my money on prices and rents dropping, with prices dropping incrementally more to bring the ratio in line.
40% of SFH purchase in May were investor here in sonoma County. This trend should create some pressure on rentals. Would guess that in area's with significant FC sales that rental units will suddenly be hitting the market later this summer and fall once the rehab work has been completed.
safe_as_apartments, OER is trending up - and so have rents where I live. Yes, there are problems with that measure - there are problems in all the data, but we make do!
I didn't check the OER for Boston. Maybe it's declining.
Paul Kasriel, chief economist with Northern Trust in Chicago, questioned the Realtors assessment that this is a good time to enter the market, saying weak sales and prices suggest that potential buyers are smart to be sitting on the sidelines right now.
No one is buying into their Kool-Aid; thats why prices are falling, he said. It could be that theyre going to fall a lot more. The Realtors tend to be overly optimistic. Eventually theyll be right about prices turning around. I dont know when prices are going to stabilize but I suspect theyll fall more than they think this year. It may be a much better time to buy six months or a year from now.
But as you showed the other day the lower end of the scale had a much more rapid rise in price. Wouldnt more of that rapid rise in price be deflating from the OFHEO index now?
The OFHEO system is heavily biased to show milder changes. It excludes houses that cross the 417K conforming loan limit, which obviously tends to include houses with a bigger change in price. Suppose you have two houses at 300K. One goes to 400K and one to 500K. The average is a 50% increase - but OFHEO shows just 33% because the house that went to 500K drops out of their sample. Same effect when prices go down.
There's also a bias for a delayed report on the drop, since the houses/areas with the biggest run-ups are tending to be the ones with the earlier falls. So, again, OFHEO is tending to exclude the early fallers and so it shows we're barely past peak.
To top things off, it's the most expensive, most bubblicious homes with the fastest drops that are of most macroeconomic significance, and OFHEO is tending to exclude all those groups. So it's very bad guidance for policymakers.
NAR captures 30-40% of all existing-home sale transactions with its monthly survey. In other words, they are extrapolating. Not a bad thing necessarily, but unlike the reports by the National Association of Homebuilders, the NAR does not report its margin of error.
I'd just like to know where I an meat some Hot Indian Babes?
The ones I see around town look rather skeevy and disheveled. After about age 25 there is DRAMATIC fall off in attractiveness. Plus that dot head thing ...
I'm aware of the truism that "there are problems with all data". That knowledge should motivate us to see how big the problems are.
I did recall incorrectly, however. OER does not ask homeowners for equivalent rent, they ask to determine the share of the market basket. For more information, see http://www.stats.bls.gov/bls/fesacp1120905.pdf.
OER has gone through significant changes in the last 20 years. I'm not sure that they have backward adjusted the historical CPI-U for these changes, although I am sure such series are available.
Calculated Risk writes:
Notice I wrote "perhaps rising rents" - I think rents will likely decline in some areas, if not nationally.
Ahhhhh, your conversion to the dark side is almost complete.
With 2-4 million surplus dwelling units nationwide there is no force that can prevent the evil empire of landlords from having to lower rents. Besides the Lords at the Fed need OER to decline to offset real inflation just like they needed it in the run up to lag the true cost of housing for the same reason.
Rents are like Case-Shiller in that they are priced at the margins. There's gonna be a whole lot of very low cost inventory wherever there are boomers waiing for things to improve. Know any places without boomers?
anyone had a chance to visit CR's link to housing wire today...
Anshu Jain, head of global markets at Deutsche Bank AG (DB: 87.12, +1.73%), said in remarks Thursday that most financial institutions are now facing a solvency issue around housing a surprising assessment, to say the least, and one that underscores just how damaging the continued freefall in U.S. housing is likely to be for financial outfits that invested heavily in the area during the recent run-up.
I say rents will fall with savings/bond yields as they correlate with lower corporate sales, lower home sales, lower self esteem, lower skirts and just gobs of lower stuff that was never put into any economic models.
Seems from the article that it's simply a sales price index and a rental price index. It's interesting and all but if you're trying to forecast the extent of the bubble correction on a national scale you'll need more tools in your box than this
Yeah, I don't think that we're likely to see much overshoot to the downside, but in markets (apartment buildings in Naples, anyone)where there was alot of overbuilding, we're likely to see rents go down considerably. Even with credit contracting, once the housing starts cashflowing on an annual basis, you'll start getting landlords with money looking to buy.
R. of course just as some places are always more expensive, there may be local economic or legal reasons for the historic P/R ratio to be different. Setting them to 1 allows cross market comparisons. But it does mean that you have to be very careful not to regard 1982 as some sort of magical time where the ratio was "right" But you CAN say that for almost 20 years it was somewhere between .9 and 1.1 before taking off to the current, stratospheric levels.
An old favorite topic of mine was a wild goose chase related to "Irish Covered Bonds", and the early era of the tsunami of easy liquidity which was connected to this type of GSE-like monster -- which connects to CDOs, and shitloads of derivatives and rating agency magic and obviously this whole ponzi scheme had to blow up at some point, and IMHO, the worst is yet to come. I got into researching this stuff back in 1999 when Amgen was dealing with Immunex and looking at moving operations to Ireland, and along the way, over the years, I was amazed at the growth of these things and then the buildout by SIFMA with so many foul timebombs which were never regulated!!!!
The mid-size lender said in a statement that "changes in its corporate calendar and internal considerations" had forced it to reschedule the pricing of the bond.
The Irish covered bond branded as an asset covered security or ACS is a bond underpinned by Irish legislation and backed by a ring-fenced pool of assets on the issuers balance sheet.
"I'll second that. I'm seeing FOR RENT signs in places that never used to have them, and these are in the good parts of town."
tj, please elaborate. All I see in good parts of town are houses listed at peak prices, teardowns/remodels continuing, fairly high rents, smug LL's and complete denial that anything that's going on in the world will have any effect on this part of town. Can you sense my frustration?
Watching paint dry on growing grass is taking it's toll... Though I do have an acquaintance trying to sell a multi-million $$ house who is uh... nervous. Waiting for a rich foreigner to come along...
I'm housing bear myself, but Dec 1982, at the end of a rather horrid recession, seems like a strange baseline to converge back to, unless you're really confident in predicting this recession will put unemployment up to 9-10%.
Wouldn't it make more sense to look at something like the average over the 1987-2000 period? Eyeballing it, that looks more like 1.1 or 1.2.
It may be that the "good parts of town" across the country do fairly well in the years ahead.
One effect of the bubble that deserves more discussion is widening income inequality. There's nothing like playing with debt to create a few winners and lots of losers.
Couple that with the Bush tax cuts and we're looking at a income polarization not seen since the Gilded Age. This will be reflected in future rents/prices of "good" versus "bad" parts of town.
Where I am, rents seem to be up somewhat over the past two years.
We are a coastal university/tourist town without enough buildable land to expand much. So there's a constant level of demand and there has always been some saturation of the rental properties: eight students in a 4 BR to save $$, retirees taking in roomers, legalization of granny units, etc.
Things that could potentially put downward pressure on rent: employment declines in the Silicon Valley (nearby) reducing the # of renters, expensive vacation rentals (we have hundreds) going on the market as regular rentals if the tourist market declines, etc.
Re: the graph.
It's just a number. You can multiply by a constant at will (whether that be 1.2 or the actual price-to-rent on a particular date). The shape will not change. And it's a helluva shape.
I'm not sure if the 1987-2000 period is better than 1982, but looking at the graph for your period still puts the number at less than 1.1 for OFHEO since OFHEO touched, but never broke 1.1 during that period. Just eyeballing it, I'd say the number would be about 1.05 for OFHEO and not much different for C-S (C-S went both higher and lower than OFHEO during this period).
What this graph does show, regardless of what the "right" period is, is that the ratio started going up dramatically in around 1999 or 2000, and it went way beyond any ratio we had during the prior 18 or so years, and we now appear to be on track to see it drop back to its historical ratio somewhere near 1.0 (with an overshoot being very possible).
mock turtle writes:
anyone had a chance to visit CR's link to housing wire today...
Anshu Jain, head of global markets at Deutsche Bank AG (DB: 87.12, +1.73%), said in remarks Thursday that most financial institutions are now facing a solvency issue around housing a surprising assessment, to say the least, and one that underscores just how damaging the continued freefall in U.S. housing is likely to be for financial outfits that invested heavily in the area during the recent run-up.
OT: I wanted to make one lasting, final rant related in general to Yun -- from his retarded attempt to lash out at the media in general and perhaps blogs like this one right here, in suggesting that home values are impacted by "the media".
Hence, The Yun's of the world and fellow realtors rely and fed upon outdated information and thus rely on the ability to manipulate price in an inefficient market. Thus, internet blogs and the faster transmission of information is resulting in an efficient market where buyers are more informed and more able to be part of an arms-length transaction, in which the mutual benefit of exchange is fair, versus manipulated and synthetically altered by inferior pricing information.
"Faster information" in this case is essentially a matter of an organization like NAR hyping manipulated data and then using the media to communicate pricing, just as wall street analysts might suggest and manipulate future value. Thus, in both cases, mass media outlets linked to commercialized dissemination of false and misleading information work at attempting to bias local markets, on a ,mass scale -- which is the issue here in regard to consumer behavior and the connection to anti-trust price fixing problems that are supported by The Bush Coup.
I rest my case, Yun is a bitch, who serves the purpose of being a retarded puppet with broken strings.
Gatsby,
Jas' brother is actually CR and that is why they bicker so much. Or, at least, that is what some guy eating a gyro at the mall told me. Makes sense.
"What this graph does show, regardless of what the "right" period is, is that the ratio started going up dramatically in around 1999 or 2000, and it went way beyond any ratio we had during the prior 18 or so years"
No argument from me, but that also coincides with the drop in mortgage rates from the 8s to the 5s and 6s, if borrowing cost could be reflected in that graph it might be more insightful, might not I don't know. I'm not a big fan of these national viewpoints anyway. Locally my starter home neighborhood in the Pac NW has seen a 10% drop from the peak 2 years ago but you can rent the homes for just a shade above the 80% mortgage payment right now so I have a hard time assessing the damage from here
I think the nature of the rental market (not just in terms of economics, but also social dynamics) is going to change, and that while the rental/ownership costs series will continue to be available, over time those changes will be sufficiently distorting that most trend conclusions drawn from the numbers will be dubious.
Whenever a phenomena gets a tawdry political slogan attached to it like 'the ownership society', you can safely bet that the underlying trend is overdone, on its last legs, and about to be superceded by something new. Trying to figure out the direction of the rental market after that cusp is a little premature.
As residential housing loses its identity as the one leveraged investment a middle class person can safely make, and reverts to being simply a choice about living arrangements, I'm guessing more better off people will rent, and nicer stuff will be available for rent. I'd also guess that a lot of net cash flows projected to support investment decisions in rental property are going to turn out to have been decidely optomistic. Whethre that will bcause rentals don't hold up, or property taxes and operating expenses rise, I don't know.
NAR has an interest in rising home prices. Being a private group, they can create a captive band of economists who say what they want, just like Moveon.org or, for that matter, the Cato Institute (although Cato deserves a little respect and until this decade, a lot).
Yun just happens to be the guy in charge of those captive economists.
I'm a little more annoyed by the fudginess of government numbers lately; I'm entirely unconvinced by "hedonics" in CPI calculations and that's not the only area where fudging has occurred.
Still, we're talking about long run house values relative to rent. Remember, in theory real estate should become more valuable over time at approximately the same rate as national income increases, absent regulatory change, etc.
We can make a model of what we're all thinking in this thread. Rent should be = to [i + t + m - e], where i is mortgage interest, t is taxes, m is the market rate of return, and e is a variable factor representing a speculator's willingness to forgo m while seeking capital gains; in other words, loss to rental value due to saturation of the rental market with speculatively-held property.
In the short run, the fraction of property held by speculators is fixed (the Qd of housing for personal use is price-elastic in the short term, because people don't immediately move out of their parents' basement based on 10% drops in area rent)
At the same time, Ownership costs are [i + t + u], u being upkeep.
There being a runup in prices and overcapacity in the market, REO properties, which generally are not rented, increase e in the short run [by reducing saturation and overcapacity while speculators still own property] but reduce e in the long run [negative factor for future prices = speculators want out].
This story, which is admittedly stridently simplistic, seems to imply what we're seeing is a reasonable story: rents simply aren't impressed by the price falls in housing, at least not immediately.
As the liquidation continues, expect rents to start to drop a bit and protect the rent/own price ratio from overshooting.
There's still a HMID, and as speculators leave the market it brings the net cost of each additional owner's dollar down.
Where is the extra money going to come from? All those incredible, high-paying new jobs in our healthy economy? Runaway inflation is going to keep rent prices in check as more money is devoted to everything else from food to energy to healthcare.
Inflating out of this mess is just no longer possible. There are no jobs, there is no way to increase salaries across the board, and they can't just make renting unaffordable so that housing suddenly seems affordable.
IMHO, there are only 3 ways to fix unaffordable housing:
Lower prices (the endgame of all this, though the powers that be will resist it to the last.)
Higher salaries (this will be fought against even harder than lower housing prices. As long as there are serfs stuck working for peanuts, we won't be seeing higher wages.)
Tricky Ponzi financing that pushes the actual payments off to some date in the future when everything explodes. (Been there, done that, cleaning up the mess.)
I agree with PtM, minus the heavy helping of conspiracy theory. High salaries are being fought against by hardworking, well educated, intelligent (and more to the point, currently underpaid!) people the world over, not by Hank Paulson.
I am a payroll and HR consultant. I have seen a lot of companies compensation policies. Higher salaries only happen if a person changes jobs. If a worker stays in the same job, then the most they can get as far as a yearly raise is 3-5%. This is generally set by the board of directors or some compensation department and there is no way for managers to go beyond that even for their best employees who are threatening to leave.
It is company specific of course and does not apply to commissioned or very high performers and executive but these do not make up the majority of the workforce.
So wetting my finger and sticking it in the air, tells me that for the majority of workers, they will see a 4% raise each year as most people do not change jobs that often. Yes, I am making some assumptions and not quoting hard data.
Prices must come down in markets like San Diego, Miami, etc.
I think rents have been impacted by the possibility of greater demand and one component of the housing bubble was the amount of speculators buying properties to flip or rent (for future cash flow), thus a lot of homes bought late under the guise of speculation and or investment were bought by suckers. These same type of investment suckers are trying to buy into the downward revisions and get a cheaper property for future cash flow -- but they fail to factor in the glut of rental inventory, and as such, they are at the back of the line in terms of attracting renters willing to pay top dollar.
I think a lot of the inventory moving now is just speculative and will end up being cashburn bait further down the line, as prices all fall. Rents will go lower and that will impact these types of cashflow gurus, which is great, because a good bubble needs to have this type of excess cash blown out. As we see these people capitulate later, and people really dropping prices in a year or so, then you will see a slow return to pre 2000 conditions and some markets will see more activity, but until that time, everything is dead meat!
Rents are definitely going down in Los Angeles - many of the housing flippers can't unload their houses/condos, and thus are trying to rent them. My wife and I have noticed a big increase of for rent signs, and property listings here in L.A. Just simple supply and demand takes care of the rest of the equation.
Falling prices and rising rents aren't the only way to get the ratio back in line. BOTH prices AND rents could fall, too -- as long as prices fall more...
Thus it's also dangerous to assume that the price drop is "half way" over (or whatever fraction) based on this data.
I think this data is very useful in evaluating the cycle in general. Naturally, each specific market will have its own variances, and the decline will be significantly influenced by local inventory conditions. Accordingly, I would expect price declines in Miami to overshoot the bottom indicated by any rule of thumb analysis.
HAPPY FOURTH TO ALL!!!!!
CR,
I'm having a little trouble wrapping my mind around this one. The CS index includes all loans (including those above the conforming limits) the OFHEO does not. (Thats actually kind of a question but I'm pretty damn sure.)
But as you showed the other day the lower end of the scale had a much more rapid rise in price. Wouldnt more of that rapid rise in price be deflating from the OFHEO index now?
Do you think the fact that the CS has fallen faster is more attributed to more coastal properties and no midwest?
On a side note do you (or anyone else) know if the OFHEO now includes loans that adhere to increase in the conforming limits? That might make the OFHEO even better and closer to the CS
Last night I posted a paste on shadow rentals, what about that? Huh?
Anecdotally, rents are decreasing a bit in the Los Angeles area. Don't see much possibility of a nationwide increase with the economy perched on the edge of a chasm.
Wow, I better ask for a rent reduction.
Just wanna add this to the mix (again) as it did fit into the flavor of the days:
Robert Bach, Senior VP & Chief Economist, Grubb & Ellis TOPIC: Commercial Real Estate: The Next Shoe to Drop?
For apartments, the increase in the renter pool resulting from rising residential foreclosures will be offset by an increase in shadow supply (unsold condos and foreclosed houses being offered for rent). The economic recovery, when it comes, could be shallow, however.
PROGRAM RECAP May 28, 2008 Melbourne, Florida
Please visit SpaceCoastEDC.org
Cona Glod | 07.03.08 - 2:01 am
Something tells me rents won't increase much. And, if they do (because foreclosed upon FBs are looking for dwellings), it will be temporary. Once the banks start unloading their inventory, rents will be hard pressed to rise.
Anecdotal on rents in Houston - last month moved into a townhouse inside the 610 loop from The Woodlands (eliminated a ~35 mile one way commute) - made an offer that was 15% below asking, told the broker after they said no to offer a two year lease and see what the counter was...ended up 7% off of asking at ~$1.00/sq ft with comps ~$1.10 - ~$1.30 from Houston Real Estate - Houston Homes, Houston Home Value and Houston Relocation (asking for the comps)
Anonymous writes:
Just wanna add this to the mix (again) as it did fit into the flavor of the days:
Got a link?
TIA
OT but a doozy:
FT.com / UK - UBS in spat with hedge fund over CDO
Paramax claims that, from the beginning, the UBS hedge was cosmetic. In May 2007, when the original agreement was signed, the terms were a fraction of the market rate. Also, Paramax had only $200m under management and its agreements with its own investors limited it to commit no more than $40m to any single deal. Thus, it could never compensate UBS fully for any meaningful loss in value of the $1.3bn UBS was trying to insure, it claims
BTW-
price to rent CEPR paper link:
http://www.cepr.net/documents/publications/ownrent_2008_04.pdf
ades,
http://www.spacecoastedc.org/LinkClick.aspx?fileticket=juJo8wOylek%3D&tabid=207&mid=747
It's pretty hard to imagine that rents will be affected much at all. There will be a lot more rentals and a lot more people renting, so I'd expect anecdotal and local variation in both directions but not much of a national trend.
Of course, muni regs screw these indexes up for a lot of large cities. Rent control is the bane of decent analysis.
Case Schiller suggests that half of the fall in house prices has already occurred; since I strongly suspect there is a lot more falling to be done given the foreclosure situation and the coming Alt-A issues & ARM resets, that means we could be in for a relatively serious overshoot.
Get your checkbooks ready, gents.
CR--am I the only one that thinks it's very convoluted to think in terms of 1982=1.0, instead of the fluctuation in the ACTUAL Price to Rent ratio over time?
The actual Price/Rent chart would be much simpler to digest, and easier to grasp the magnitude of the changes.
ades, I use the OFHEO Purchase only index, but for this graph I used the overall index - because that is what the Fed economist used in 2004.
In general I think Case-Shiller is better for a number of reasons - like including non-GSE mortgaged homes.
All, if rents are flat - or even decline - then prices have to fall further by this measure. So far rents have been trending up, but that could change.
Best to all.
ades,
Did you see Yun: "The nation's economy and the housing market will show measurable improvement fromthe second half"
LOL! Nice gig, I need to find a picture of this cluck....
R, yeah, but that data is harder to come by, especially for individual cities - and I wanted to update the Fed paper from 2004 (using the same approach).
I think what we care about is the relative changes - and this graph shows that well.
Best Wishes.
CR & Kona, thanks!
Anon, I love Yun, I would definitely list him as my favorite economist...
I do wonder how he sleeps at night... I wonder if he has kids that can read the paper... It would pretty sad to get called out by your kid...
do you (or anyone else) know if the OFHEO now includes loans that adhere to increase in the conforming limits? That might make the OFHEO even better and closer to the CS
Yes, but no.
Those observations are being reported now, but bear in mind that OFHEO's is an index based on repeat transactions of the same property. Therefore, those data points won't get baked into the index until the property changes hands or get refinanced again. So the impact will be gradual and minimal.
CR, have rents been trending up, or have OER been trending up?
I'm not certain that the method of measuring OER is accurately reflecting equivalent rent. IIRC, the government asks the homeowner what it would rent for, then averages it based on certain criteria.
In my neck of the woods in Boston, actual rents have been trending down.
This is good: Lawrence Yun Watch - Follow the NAR's hack as he denies the housing bubble and crash: LA Times real estate writer destroys Lawrence Yun and the NAR
Photo of Yun here, but you have to go down about 1/2 way:
Florida Housing market Thread (to live, auction, cost) - (FL) - Page 25 - City-Data Forum
For all you Larry Yun h8rz:
Lawrence Yun Watch - Follow the NAR's hack as he denies the housing bubble and crash
Oh.great stuff here:
his, at least, is the thrust of an essay by Lawrence Yun, the senior economist for the National Assn. of Realtors. Read the whole thing here. Highlights:
"To a great extent, we can thank steady media coverage of the real estate market correction for unfounded consumer concerns.... But theres no real correction where consumers are concerned. Yes, home price appreciation has slowed considerably, and nationally were expecting a price drop of 1% for 2007. But that drop comes at the tail end of a five-year spurt that increased home prices by 53%. We may have taken one small step back, but thats after taking 53 steps forward."
Lawrence Yun Watch - Follow the NAR's hack as he denies the housing bubble and crash: LA Times real estate writer destroys Lawrence Yun and the NAR
I'm going to go one further: when the housing boom was going on, actual rents increased (while OER lagged), now actual rents are apparently decreasing (while OER may be going up).
If OER is recorded in the manner I believe, then it makes more sense to do an on the ground survey of actual rents paid.
I think rents are going to FALL. That's right, fall. Energy and food prices will continue to tap into disposable income, and the debt burden of consumers will start to cut into what they can afford to pay for housing. Anecdotally I'm hearing lots of stories about additional months of free rent, and an incredible inventory of condos are beginning to flood the market in many major cities. I'm putting my money on prices and rents dropping, with prices dropping incrementally more to bring the ratio in line.
40% of SFH purchase in May were investor here in sonoma County. This trend should create some pressure on rentals. Would guess that in area's with significant FC sales that rental units will suddenly be hitting the market later this summer and fall once the rehab work has been completed.
safe_as_apartments, OER is trending up - and so have rents where I live. Yes, there are problems with that measure - there are problems in all the data, but we make do!
I didn't check the OER for Boston. Maybe it's declining.
Best Wishes.
Gavshire Hathaway, that is very possible - if rents fall, then prices have to fall further by this measure.
Notice I wrote "perhaps rising rents" - I think rents will likely decline in some areas, if not nationally.
Best Wishes.
Paul Kasriel, chief economist with Northern Trust in Chicago, questioned the Realtors assessment that this is a good time to enter the market, saying weak sales and prices suggest that potential buyers are smart to be sitting on the sidelines right now.
No one is buying into their Kool-Aid; thats why prices are falling, he said. It could be that theyre going to fall a lot more. The Realtors tend to be overly optimistic. Eventually theyll be right about prices turning around. I dont know when prices are going to stabilize but I suspect theyll fall more than they think this year. It may be a much better time to buy six months or a year from now.
But as you showed the other day the lower end of the scale had a much more rapid rise in price. Wouldnt more of that rapid rise in price be deflating from the OFHEO index now?
The OFHEO system is heavily biased to show milder changes. It excludes houses that cross the 417K conforming loan limit, which obviously tends to include houses with a bigger change in price. Suppose you have two houses at 300K. One goes to 400K and one to 500K. The average is a 50% increase - but OFHEO shows just 33% because the house that went to 500K drops out of their sample. Same effect when prices go down.
There's also a bias for a delayed report on the drop, since the houses/areas with the biggest run-ups are tending to be the ones with the earlier falls. So, again, OFHEO is tending to exclude the early fallers and so it shows we're barely past peak.
To top things off, it's the most expensive, most bubblicious homes with the fastest drops that are of most macroeconomic significance, and OFHEO is tending to exclude all those groups. So it's very bad guidance for policymakers.
"I do wonder how he sleeps at night..."
Probably pretty good, I don't think being stupid affects one sleep and may in fact actually improve it.
I'm not trying or wanting to be OT, but yah know... this is dynamic and stuff (shit) gets triggered:
This is a killer (old) link:
NAR Inventory Methodology, or Lack Thereof
NAR Inventory Methodology, or Lack Thereof - Housing Doom
NAR captures 30-40% of all existing-home sale transactions with its monthly survey. In other words, they are extrapolating. Not a bad thing necessarily, but unlike the reports by the National Association of Homebuilders, the NAR does not report its margin of error.
Wasn't the interest rate on a mortgage a nipple hair under 20% in 1982?
that was a pubic hair as I recall
How is price to rent derived?
Is it (total mortgage payment (interest + principle) + property tax) dived by rent?
Or is it the interest only portion of mortgage + prop tax divided by rent?
A red one, if I recall correctly.
I'd just like to know where I an meat some Hot Indian Babes?
The ones I see around town look rather skeevy and disheveled. After about age 25 there is DRAMATIC fall off in attractiveness. Plus that dot head thing ...
CR,
I'm aware of the truism that "there are problems with all data". That knowledge should motivate us to see how big the problems are.
I did recall incorrectly, however. OER does not ask homeowners for equivalent rent, they ask to determine the share of the market basket. For more information, see http://www.stats.bls.gov/bls/fesacp1120905.pdf.
OER has gone through significant changes in the last 20 years. I'm not sure that they have backward adjusted the historical CPI-U for these changes, although I am sure such series are available.
Kewl! Just in time for the 4th of July
-- The Rentership Society.
I'm stoking the Barbee with IMB certs. Tube Steaks and Iron City for everyone.
Calculated Risk writes:
Notice I wrote "perhaps rising rents" - I think rents will likely decline in some areas, if not nationally.
Ahhhhh, your conversion to the dark side is almost complete.
With 2-4 million surplus dwelling units nationwide there is no force that can prevent the evil empire of landlords from having to lower rents. Besides the Lords at the Fed need OER to decline to offset real inflation just like they needed it in the run up to lag the true cost of housing for the same reason.
Rents are like Case-Shiller in that they are priced at the margins. There's gonna be a whole lot of very low cost inventory wherever there are boomers waiing for things to improve. Know any places without boomers?
I was really shocked that SIFMA and PennyMac didn't split the rent:
PennyMac Leases 27K SF at Corporate Point - CoStar Group
Anecdotally, rents are decreasing a bit in the Los Angeles area.
I'll second that. I'm seeing FOR RENT signs in places that never used to have them, and these are in the good parts of town.
IMHO rents will fall; they're much more economically sensitive.
Anonymous Bosch,
Always the one splitting hares
anyone had a chance to visit CR's link to housing wire today...
Anshu Jain, head of global markets at Deutsche Bank AG (DB: 87.12, +1.73%), said in remarks Thursday that most financial institutions are now facing a solvency issue around housing a surprising assessment, to say the least, and one that underscores just how damaging the continued freefall in U.S. housing is likely to be for financial outfits that invested heavily in the area during the recent run-up.
there, it is said, "a solvency issue"!
I say rents will fall with savings/bond yields as they correlate with lower corporate sales, lower home sales, lower self esteem, lower skirts and just gobs of lower stuff that was never put into any economic models.
"How is price to rent derived?"
Seems from the article that it's simply a sales price index and a rental price index. It's interesting and all but if you're trying to forecast the extent of the bubble correction on a national scale you'll need more tools in your box than this
While we're talking anecdotes: Here just outside DC, I saw my first sign for "Rooms for rent". It was on the lawn of what looked like an SFR.
Probably pretty good, I don't think being stupid affects one sleep and may in fact actually improve it.
He's not stupid. He knows what his employer wants to hear and so he says it. Probably paid pretty good for it, too.
Re: lower skirts
Now THAT is definitely the worst part about a bear market.
Right. What's the point to a bare market if you lower skirts?
TOT: No Asphalt In This Girdle!
Yeah, I don't think that we're likely to see much overshoot to the downside, but in markets (apartment buildings in Naples, anyone)where there was alot of overbuilding, we're likely to see rents go down considerably. Even with credit contracting, once the housing starts cashflowing on an annual basis, you'll start getting landlords with money looking to buy.
R. of course just as some places are always more expensive, there may be local economic or legal reasons for the historic P/R ratio to be different. Setting them to 1 allows cross market comparisons. But it does mean that you have to be very careful not to regard 1982 as some sort of magical time where the ratio was "right" But you CAN say that for almost 20 years it was somewhere between .9 and 1.1 before taking off to the current, stratospheric levels.
An old favorite topic of mine was a wild goose chase related to "Irish Covered Bonds", and the early era of the tsunami of easy liquidity which was connected to this type of GSE-like monster -- which connects to CDOs, and shitloads of derivatives and rating agency magic and obviously this whole ponzi scheme had to blow up at some point, and IMHO, the worst is yet to come. I got into researching this stuff back in 1999 when Amgen was dealing with Immunex and looking at moving operations to Ireland, and along the way, over the years, I was amazed at the growth of these things and then the buildout by SIFMA with so many foul timebombs which were never regulated!!!!
Shinsei Bank shelves 30 bln yen covered bond
| Deals
| Regulatory News
| Reuters
Shinsei Bank Ltd (8303.T: Quote, Profile, Research) said on Tuesday it had scrapped plans to issue a 30 billion yen ($280 million) covered bond this month, which would have been the first offering of its kind in Japan.
The mid-size lender said in a statement that "changes in its corporate calendar and internal considerations" had forced it to reschedule the pricing of the bond.
Covered bonds raise banks hopes
FT.com / Companies / UK companies - Covered bonds raise banks’ hopes
The Irish covered bond branded as an asset covered security or ACS is a bond underpinned by Irish legislation and backed by a ring-fenced pool of assets on the issuers balance sheet.
"Anecdotally, rents are decreasing a bit in the Los Angeles area."
"I'll second that. I'm seeing FOR RENT signs in places that never used to have them, and these are in the good parts of town."
In what good parts of L.A. are these FOR RENT signs appearing, generally speaking?
"I'll second that. I'm seeing FOR RENT signs in places that never used to have them, and these are in the good parts of town."
tj, please elaborate.
All I see in good parts of town are houses listed at peak prices, teardowns/remodels continuing, fairly high rents, smug LL's and complete denial that anything that's going on in the world will have any effect on this part of town. Can you sense my frustration? 
Watching paint dry on growing grass is taking it's toll...
Though I do have an acquaintance trying to sell a multi-million $$ house who is uh... nervous. Waiting for a rich foreigner to come along...
In fact mortgage payment to rent is probably below one using 1982 as an index year. If I didn't have to pretend to be working I'd do the math
I'm housing bear myself, but Dec 1982, at the end of a rather horrid recession, seems like a strange baseline to converge back to, unless you're really confident in predicting this recession will put unemployment up to 9-10%.
Wouldn't it make more sense to look at something like the average over the 1987-2000 period? Eyeballing it, that looks more like 1.1 or 1.2.
It may be that the "good parts of town" across the country do fairly well in the years ahead.
One effect of the bubble that deserves more discussion is widening income inequality. There's nothing like playing with debt to create a few winners and lots of losers.
Couple that with the Bush tax cuts and we're looking at a income polarization not seen since the Gilded Age. This will be reflected in future rents/prices of "good" versus "bad" parts of town.
Where I am, rents seem to be up somewhat over the past two years.
We are a coastal university/tourist town without enough buildable land to expand much. So there's a constant level of demand and there has always been some saturation of the rental properties: eight students in a 4 BR to save $$, retirees taking in roomers, legalization of granny units, etc.
Things that could potentially put downward pressure on rent: employment declines in the Silicon Valley (nearby) reducing the # of renters, expensive vacation rentals (we have hundreds) going on the market as regular rentals if the tourist market declines, etc.
Re: the graph.
It's just a number. You can multiply by a constant at will (whether that be 1.2 or the actual price-to-rent on a particular date). The shape will not change. And it's a helluva shape.
Mike D:
I'm not sure if the 1987-2000 period is better than 1982, but looking at the graph for your period still puts the number at less than 1.1 for OFHEO since OFHEO touched, but never broke 1.1 during that period. Just eyeballing it, I'd say the number would be about 1.05 for OFHEO and not much different for C-S (C-S went both higher and lower than OFHEO during this period).
What this graph does show, regardless of what the "right" period is, is that the ratio started going up dramatically in around 1999 or 2000, and it went way beyond any ratio we had during the prior 18 or so years, and we now appear to be on track to see it drop back to its historical ratio somewhere near 1.0 (with an overshoot being very possible).
mock turtle writes:
anyone had a chance to visit CR's link to housing wire today...
Anshu Jain, head of global markets at Deutsche Bank AG (DB: 87.12, +1.73%), said in remarks Thursday that most financial institutions are now facing a solvency issue around housing a surprising assessment, to say the least, and one that underscores just how damaging the continued freefall in U.S. housing is likely to be for financial outfits that invested heavily in the area during the recent run-up.
Jas's brother is head of global markets at DB?
OT: I wanted to make one lasting, final rant related in general to Yun -- from his retarded attempt to lash out at the media in general and perhaps blogs like this one right here, in suggesting that home values are impacted by "the media".
Hence, The Yun's of the world and fellow realtors rely and fed upon outdated information and thus rely on the ability to manipulate price in an inefficient market. Thus, internet blogs and the faster transmission of information is resulting in an efficient market where buyers are more informed and more able to be part of an arms-length transaction, in which the mutual benefit of exchange is fair, versus manipulated and synthetically altered by inferior pricing information.
"Faster information" in this case is essentially a matter of an organization like NAR hyping manipulated data and then using the media to communicate pricing, just as wall street analysts might suggest and manipulate future value. Thus, in both cases, mass media outlets linked to commercialized dissemination of false and misleading information work at attempting to bias local markets, on a ,mass scale -- which is the issue here in regard to consumer behavior and the connection to anti-trust price fixing problems that are supported by The Bush Coup.
I rest my case, Yun is a bitch, who serves the purpose of being a retarded puppet with broken strings.
Amen, pass the salt
Gatsby,
Jas' brother is actually CR and that is why they bicker so much. Or, at least, that is what some guy eating a gyro at the mall told me. Makes sense.
AL,
Nobody pays attention to Yun anyway. Oprah is another story. Get her to preach your gospel and you are golden.
Bubble - When the price increases well beyond the traditional valuation metrics and conclusions of a paradigm shift are flawed.
That's no so hard.
"What this graph does show, regardless of what the "right" period is, is that the ratio started going up dramatically in around 1999 or 2000, and it went way beyond any ratio we had during the prior 18 or so years"
No argument from me, but that also coincides with the drop in mortgage rates from the 8s to the 5s and 6s, if borrowing cost could be reflected in that graph it might be more insightful, might not I don't know. I'm not a big fan of these national viewpoints anyway. Locally my starter home neighborhood in the Pac NW has seen a 10% drop from the peak 2 years ago but you can rent the homes for just a shade above the 80% mortgage payment right now so I have a hard time assessing the damage from here
I meant below the mortgage payment obviously and by shade I mean about $200 which is about equal to the tax benefit
I think the nature of the rental market (not just in terms of economics, but also social dynamics) is going to change, and that while the rental/ownership costs series will continue to be available, over time those changes will be sufficiently distorting that most trend conclusions drawn from the numbers will be dubious.
Whenever a phenomena gets a tawdry political slogan attached to it like 'the ownership society', you can safely bet that the underlying trend is overdone, on its last legs, and about to be superceded by something new. Trying to figure out the direction of the rental market after that cusp is a little premature.
As residential housing loses its identity as the one leveraged investment a middle class person can safely make, and reverts to being simply a choice about living arrangements, I'm guessing more better off people will rent, and nicer stuff will be available for rent. I'd also guess that a lot of net cash flows projected to support investment decisions in rental property are going to turn out to have been decidely optomistic. Whethre that will bcause rentals don't hold up, or property taxes and operating expenses rise, I don't know.
NAR has an interest in rising home prices. Being a private group, they can create a captive band of economists who say what they want, just like Moveon.org or, for that matter, the Cato Institute (although Cato deserves a little respect and until this decade, a lot).
Yun just happens to be the guy in charge of those captive economists.
I'm a little more annoyed by the fudginess of government numbers lately; I'm entirely unconvinced by "hedonics" in CPI calculations and that's not the only area where fudging has occurred.
Still, we're talking about long run house values relative to rent. Remember, in theory real estate should become more valuable over time at approximately the same rate as national income increases, absent regulatory change, etc.
We can make a model of what we're all thinking in this thread. Rent should be = to [i + t + m - e], where i is mortgage interest, t is taxes, m is the market rate of return, and e is a variable factor representing a speculator's willingness to forgo m while seeking capital gains; in other words, loss to rental value due to saturation of the rental market with speculatively-held property.
In the short run, the fraction of property held by speculators is fixed (the Qd of housing for personal use is price-elastic in the short term, because people don't immediately move out of their parents' basement based on 10% drops in area rent)
At the same time, Ownership costs are [i + t + u], u being upkeep.
There being a runup in prices and overcapacity in the market, REO properties, which generally are not rented, increase e in the short run [by reducing saturation and overcapacity while speculators still own property] but reduce e in the long run [negative factor for future prices = speculators want out].
This story, which is admittedly stridently simplistic, seems to imply what we're seeing is a reasonable story: rents simply aren't impressed by the price falls in housing, at least not immediately.
As the liquidation continues, expect rents to start to drop a bit and protect the rent/own price ratio from overshooting.
There's still a HMID, and as speculators leave the market it brings the net cost of each additional owner's dollar down.
Oops - in my above post, my discussion assumes that the model was "+" e rather than "-" e. Hence my "increases" and "decreases" are backwards.
Rents cannot rise.
Where is the extra money going to come from? All those incredible, high-paying new jobs in our healthy economy? Runaway inflation is going to keep rent prices in check as more money is devoted to everything else from food to energy to healthcare.
Inflating out of this mess is just no longer possible. There are no jobs, there is no way to increase salaries across the board, and they can't just make renting unaffordable so that housing suddenly seems affordable.
IMHO, there are only 3 ways to fix unaffordable housing:
Do you have this for San Diego?
I agree with PtM, minus the heavy helping of conspiracy theory. High salaries are being fought against by hardworking, well educated, intelligent (and more to the point, currently underpaid!) people the world over, not by Hank Paulson.
I am a payroll and HR consultant. I have seen a lot of companies compensation policies. Higher salaries only happen if a person changes jobs. If a worker stays in the same job, then the most they can get as far as a yearly raise is 3-5%. This is generally set by the board of directors or some compensation department and there is no way for managers to go beyond that even for their best employees who are threatening to leave.
It is company specific of course and does not apply to commissioned or very high performers and executive but these do not make up the majority of the workforce.
So wetting my finger and sticking it in the air, tells me that for the majority of workers, they will see a 4% raise each year as most people do not change jobs that often. Yes, I am making some assumptions and not quoting hard data.
Prices must come down in markets like San Diego, Miami, etc.
I think rents have been impacted by the possibility of greater demand and one component of the housing bubble was the amount of speculators buying properties to flip or rent (for future cash flow), thus a lot of homes bought late under the guise of speculation and or investment were bought by suckers. These same type of investment suckers are trying to buy into the downward revisions and get a cheaper property for future cash flow -- but they fail to factor in the glut of rental inventory, and as such, they are at the back of the line in terms of attracting renters willing to pay top dollar.
I think a lot of the inventory moving now is just speculative and will end up being cashburn bait further down the line, as prices all fall. Rents will go lower and that will impact these types of cashflow gurus, which is great, because a good bubble needs to have this type of excess cash blown out. As we see these people capitulate later, and people really dropping prices in a year or so, then you will see a slow return to pre 2000 conditions and some markets will see more activity, but until that time, everything is dead meat!
unless you're really confident in predicting this recession will put unemployment up to 9-10%.
U6 is already higher than that.
Back out the phantom jobs that the Birth Death model creates, and we're probably north of 7%, even in U3.
Remember that rental prices go down most in a serious recession due to house sharing.
Two people living in a 2 BR, where once there was one.
Nominal rents can even go up, while real rents go down, with this happening.
But of course, rents are not going up. Even in the relatively healthy Silicon Valley, rents increases have stalled for the last 3 months.
Rents are definitely going down in Los Angeles - many of the housing flippers can't unload their houses/condos, and thus are trying to rent them. My wife and I have noticed a big increase of for rent signs, and property listings here in L.A. Just simple supply and demand takes care of the rest of the equation.
Falling prices and rising rents aren't the only way to get the ratio back in line. BOTH prices AND rents could fall, too -- as long as prices fall more...
Thus it's also dangerous to assume that the price drop is "half way" over (or whatever fraction) based on this data.
I think this data is very useful in evaluating the cycle in general. Naturally, each specific market will have its own variances, and the decline will be significantly influenced by local inventory conditions. Accordingly, I would expect price declines in Miami to overshoot the bottom indicated by any rule of thumb analysis.