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Tuesday, October 13, 2015 12:54 PM

Hooray! Huge Rent Hikes Coming; How Will It Affect Price Inflation?

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In news that is bound to make the inflationists at the Fed as well as property owners happy, Landlords Will Hike Rents by 8% this Year.

Some 88% of property managers raised their rent in the last 12 months and 68% predict that rental rates will continue to rise in the next year by an average of 8%, according to a survey of more than 500 of Rent.com’s property management customers, which the site says represents thousands of rental properties and hundreds of thousands of rental units. That’s nearly three times the wage increase that most employees can expect this year.

What’s more, 55% of property managers said that they are less likely to offer concessions or lower rents in order to fill vacancies. One reason why they’re getting even tougher: They are in a stronger position than they were this time last year.

More than 46% of property managers surveyed reported a decrease in rental vacancies in Rent.com’s survey and, in the second quarter of 2015, vacancy rates in the U.S. for rental housing was 6.8%, the lowest it has been in almost 20 years, according to data from the U.S. Census Bureau.

Despite this, many renters are spending more than 30% of their income on rent (the amount generally recommended) and need help qualifying for the lease.
Yardi Survey

Reader "BJ" is retired but works part-time a number of hours each week, surveying apartments for rent. He reports ...
Hi Mish

I am retired but work part-time for Yardi from my home, surveying apartments for rents. Yardi runs a full survey 3 times a year, Jan, May and Sept. These generally run about 6 weeks.

Yardi has the country divided into 24 sectors and we normally work 6-7 sectors once a month for a week on a rotating basis.  Toward the end of the survey, we can work any market and I've been keeping track of a few select places. From what I see, rents are up and up a lot. Some of the places I watch are up 7% or more than last year for the same apartments.

The absolute worst places to be looking for a rental unit are San Fran and North LA. If anyone does answer the phone in those areas, it's either a new building just opening, or they don't have anything. You can't even get on a waiting list. I've seen apartments in tight areas where they want you to make 3X net before they will talk to you.

Portland, Seattle, Washington DC, northern NJ, Miami and Boston are also difficult. I talked to a complex in Portland last week that had 3500 apartments under management with a total of 7 open apartments.

I am amazed by the amount of apartments that are either tax credit or subsidized in some manner. All of them have long waiting lists.
Measuring Housing Inflation

The Fed wants inflation. But how do they measure it?

The Fed's preferred measure is PCE (personal Consumption Expenditures) price changes, not the CPI. The housing components are quite dissimilar.

Sam Ro writing for Business Insider explains the Difference Between PCE And CPI.
Why does the Fed prefer PCE over CPI? Societe Generale's Aneta Markowska explained in a June 19 research note:

"The official switch from CPI to PCE occurred in 2000 when the FOMC stopped publishing CPI forecasts and began to frame its inflation projections in terms of the PCE price index. This shift, announced by Alan Greenspan during his testimony to Congress, came after extensive analysis done by the Fed. The conclusion was that the PCE has several advantages over the CPI, including (1) the changing composition of spending which is more consistent with actual consumer behavior, (2) the weights, which are based on a more comprehensive measure of expenditure, and (3) the fact that PCE data can be revised to account for newly available information and improved measurement techniques."

Doug Short at Advisor perspectives Deconstructs the CPI as follows.

That pie chart was produced from the December 2014 BLS PDF on the Relative Importance of Components in the Consumer Price Index

But housing contains shelter, insurance, fuel, rents, and other items. Here is a breakdown of shelter.

Housing Components in CPI42.173
….Shelter 32.711
……..Rent of Primary Residence 7.159
……..Lodging Away from Home 0.839
……..Owners' Equivalent Rent24.339
……..Tenants' and Household Insurance0.375
….Fuels and Utility5.273
….Furnishings 4.189

Please note that home prices are nowhere to be found. The Fed believes homes are a capital expense.

The BLS also ignores home prices, and neither accurately count rents.

Of the 32.711% weighing to CPI "shelter" only 7.159 percentage points are assigned to rent. The largest single item is Owners' Equivalent Rent (OER) accounting for a whopping 24.339% of the CPI.

Owners' Equivalent Rent

The BLS Explains How the CPI Measures Price Change of Owners' Equivalent Rent.
The expenditure weight in the CPI market basket for Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

The following questions, asked of consumers who rent their primary residence, are the basis of the weight for Rent: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?”

From the responses to these questions, the CPI estimates the total shelter cost to all consumers living in each index area of the urban United States.
Essentially the BLS asks home owners how much rent they would pay if they rented their own homes from themselves. And that is the single largest component in the entire CPI.

Not only does the Fed and BLS miss housing bubbles, they do not even accurately measure "rent".

But hip, hip, hooray!  This will have at least some impact on the CPI and PCE so the inflationist fools will be cheering as the average renter gets crushed.

Mike "Mish" Shedlock

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