Recently, the overall rate of inflation has risen, owing partly to inflation in Owners’ Equivalent Rent (OER). But many wonder if the current rate of OER inflation, which is now at levels not seen since 2009, is simply a blip. We apply a forecasting approach to estimate whether OER inflation will continue to be elevated going forward, or whether it will revert back to the lower levels that have been more typical over the last several years. We find that OER inflation is likely to remain elevated over the next year.
OER is used in the US and in many other countries to estimate inflation in homeowner housing costs. At its core, OER captures the implicit rent that a homeowner would have to pay if he or she were to rent instead of own the same home (or equivalently, the funds that the homeowner is sacrificing by living in the home instead of renting it to someone else). The OER of a particular home is the rent that the home would command under current market conditions. In practice, statistical agencies estimate OER inflation for homes in a particular part of a city using inflation in the market rents of nearby rental units. (For more details on how inflation is estimated in the US, go to www.bls.gov.)
OER plays a prominent role in both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index because of how heavily it is weighted when all the individual components are aggregated into each index. In the CPI, it accounts for roughly 25 percent of the total index. In the PCE price index—the preferred inflation indicator of the Federal Open Market Committee—it accounts for approximately 12 percent. In core inflation measures, OER accounts for an even larger share. With such a large weight, the OER component can affect the overall rate of inflation significantly.
As for what is causing OER to rise, a number of factors have been proposed. Some financial writers have suggested that a shortage of rental housing is responsible, though not everyone agrees that such a shortage exists. Proponents of the rental-housing-shortage view point to historically low ratios of completed privately-owned housing units to population and a low ratio of private construction investment to GDP.
However, if rental housing were in short supply, one would expect to see historically low rental vacancy rates. Yet these rates are not far from their levels in 1995, before the run-up in housing prices. Still, it is possible that declining vacancy rates could prompt some rent inflation. It is also possible that some cities could be experiencing historically low vacancy rates, though this is not true of the five cities we examine below.
Unemployment rates might also be expected to affect rent inflation, and they have been dropping steadily. High unemployment rates might be expected to dampen rent inflation, and declining unemployment rates might be expected to feed it....MOREAnd what about r
From ZeroHedge:
We have been pounding the table since 2009 that without a sustainable increase in average disposable income, the US housing market - that core driver for "wealth effect" and net worth for the "rest of us", i.e., those non-1%ers whose net worth is not tied up in various rigged, manipulated capital markets - will never recover, and as a result, neither will the US economy.
Four dead-cat bounces, and yet another fading bubble in home prices later, this has again proven accurate, with the percentage of Americans owning houses dropping to levels not seen in 19 years....MUCH MORE
