Tuesday, March 24, 2015

Housing Tax Policy, A Series: Part 22 - Different Measures of Price/Rent (updated)

Over the past 30 years, rent inflation has outpaced core inflation.  From 1986 to 2000, this largely was from owner equivalent rent inflation, and from 2007 to the present, this was from tenant inflation.

The period of high owner equivalent rent inflation coincides with tax advantages to home ownership that would have moved the demand for housing from owners higher, relative to renters.  The period of high tenant inflation coincides with the housing bust, which has led, generally, to a shortage of housing and to attrition of households out of ownership.  I hope this state of affairs changes.  I am not particularly concerned with the absolute level of home ownership, but simply that the market should reflect a stable level of access and demand, reflecting efficient prices and returns relative to other asset classes.  If that happens I would expect to see tenant rent inflation move back below the trend in OE rent inflation, unless homeowner tax benefits are reversed.

Clearly, all else equal, we would expect home prices to rise with rents.  Here I have the Owner Equivalent Rent on Primary Residence, from the Fred graph above, along with Core CPI.  In addition, the BLS maintains metropolitan-specific CPI indexes, and I was able to find OE Rent indexes for 8 of the 10 Case-Shiller cities that covered the period I am looking at.  In the analysis here, I use the simple average of the levels and the growth rates for those 8 cities.

The 8 city series rises more quickly than the national rent level.  This probably is due to a number of factors - inadequate housing stock because of rent control and zoning restrictions, the growing value of city real estate as development spreads, etc.

After the rise and fall of home values, in the boom, Price/Rent levels in 2012 fell to a level similar to 1987.

By this measure, the 10 city index rose by 68% from 1987 and doubled from the low in 1997 to 2006.

By the nationwide measure, the rise was 45% and 64%.

In the next graph, I show the Case-Shiller indexes, relative to rent, and I add the Price to Rent ratio given by using Household Real Estate from the Flow of Funds report and Imputed Rent from the BEA.  By this measure, home prices, relative to rent, only increased by 22% and 47%.  And, this measure reached a low point in 2011, even below the lows of the 1990s.

Over the long term, I would expect the Flow of Funds and BEA Imputed Rent numbers to be the most representative, because it represents two measures that are independently tracked each year in nominal dollars.  I don't think there is a rent measure that cleanly compares to the Case-Shiller price indexes.  Since the indexes track individual homes, they may catch changes in home values that reflect real values and not inflation.  So, the Case-Shiller Indexes may be causing us to overstate relative changes in home prices.  If the Federal Reserve and the BEA measures are accurate (and these are the measures that feed GDP numbers, etc.) then home prices today, adjusted for rent inflation, are back at the levels where they were at the low point in the mid-1990s.

I think rent has at least one other interesting effect on home prices, but this is enough for today.  I will save that for tomorrow's post.


Since I can take the BEA data back to 1929, and Flow of Funds back to 1950 (and infer it back to 1929 by using the BEA data on homeowner capital consumption), I thought I would include that graph for historical perspective.

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