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uff happening scott sumner s the money illusion is coming out this is an important account of the 2008 recession it is the framework for viewing the economy that drew me into my housing work rowman littlefield is releasing a paperback version of my first book shut out this month and here is a code you can use to get it for only 18 90 use code rlfandf30 here https rowman com isbn 9781538163009 shut out how a housing shortage caused the great recession and crippled our economy and in january my followup book building from the ground up reclaiming the american housing boom will be out should be an exciting few months ahead posted by kevin erdmann at 12 25 pm 37 comments email this blogthis share to x share to facebook share to pinterest labels book lernin boxing above my weight class housing monetary policy shameless self promotion friday june 25 2021 the curious sine curve of equity returns occasionally i take a new look at how equities are doing compared to a long term sine wave over the course of the last century or so real total returns on the s p 500 follow a sine curve pattern in a surprisingly regular way i m just fitting curves here so i don t want to say too much about it but it is interesting the positive performance of the stock market over the last few years is actually right in line with the long term trends here are charts comparing real total returns to the sine curve fitted to 20th century results with the last 21 years out of sample posted by kevin erdmann at 4 50 pm 107 comments email this blogthis share to x share to facebook share to pinterest labels don t worry honey i have a system asset allocation monday june 21 2021 more on interest rates and home prices some follow up thoughts on yesterday s post there might be some more to think about regarding interest rate sensitivity and local supply constraints i asserted yesterday that the decline in yields from 2000 to 2005 was concentrated among the more expensive cities but that yields remained relatively stable in other cities during that time one implication is that expensive cities may be more rate sensitive i am unusually flummoxed by the patterns here for some reason but digging around some more i think i have become less sure of my intuition about sensitivity to interest rates and about relative housing yields across metros this first chart suggests the reason for expecting more yield volatility in expensive cities and possibly more sensitivity to interest rates clearly over time high rents have become an increasingly important factor in housing markets systematically where rents are higher gross yields are lower and where rents are low yields seem to remain relatively stable over time the relationship between rent levels and yields moves up and down through hot and cold markets in other words a bit counterintuitively where rents rise the rent price ratio declines and becomes more volatile data from zillow com affordability measures but when i look more closely at cyclical changes i just don t see the pattern that this suggests there should be during the 2000 2005 boom the closed access cities and the contagion cities experienced anomalous declines in gross yields long term interest rates also declined during that time but i think the decline in yields in those markets was a result almost purely of these anomalies in the closed access cities the anomaly was mostly continued strong rent inflation and in the contagion cities it was from short term price surges having to do with big shifts in migration that stressed their local markets taking the closed access and contagion cities out of the mix in the rest of the country if anything housing in cities with higher yields was somewhat more sensitive to changing interest rates than housing in cities with lower yields as housing has moved through the aftershocks of the boom and the crisis this seems to continue to be the case once those anomalies from 2002 2006 worked their way out of the system housing seems to be only somewhat sensitive to long term rates and it is more sensitive to rates where housing is less expensive zillow has detailed rent data going back to 2014 looking very broadly at the numbers up to 2014 gross rent price was in the same range that it had been in the 1990s and that this was more or less the case across msas over that time 30 year tips rates had declined from about 3 5 4 to around 1 one could suppose that this is because housing yields are not rate sensitive or because shifts to very tight lending had added a premium to housing yields counteracting the change in tips rates i m working very broadly here but it appears that there could be three general forces at work here 1 expected rent inflation 2 long term real rates 3 tight lending since 2007 in shut out being a little more thorough i suggested that expected rent inflation could explain differences in home prices across cities plus about a 20 price increase due to declining rates rates have declined about that much again since the boom these two factors may be correlated because if low rates trigger more home buying demand that should lower rents where supply is elastic and raise rents where supply is inelastic it s complicated from 2014 to about september 2019 housing yields appear to have declined the most in metros with higher yields this changed after september 2019 and maybe this has mostly been due to covid issues but since then yields have declined across the board i suspect that part of what is going on is that there has been a temporary decline in rents in the expensive low yield cities which has temporarily lowered their yields as those rents recover yields in those cities will move back up so it appears that there is a systematic change since 2014 of yield compression yields in low yield cities are staying about the same and yields in high yield cities are declining in any case there is a striking difference between this recent move in home prices and the 2000 2005 move there are no anomalous cities here the changes in yields are relatively similar across cities and apparently correlated with existing yields this shift could reflect at least three factors 1 unsustainable bubble activity this is always a popular choice i am skeptical of course because in general the whole existence of this project of mine owes itself to discovering evidence time after time that has contradicted these types of explanations also as with so much housing data the difference between cities dwarfs the changes within them should we call a decline from a 10 yield to a 8 yield a bubble when the country is full of cities with 6 yields this would call for tight monetary and or lending policies of course i think that is likely the continuation of a wrong perception that has been knee capping our economy for 15 years now 2 maybe prices in high yield markets are more sensitive to interest rates in that case rising rates if they ever come might be associated with declining prices i don t see much sign of loosening lending standards most of the activity is still among those with high credit scores if that is the case loosening regulations on mortgage lending could be a useful countermeasure to help keep prices from collapsing if prices are sensitive to rising interest rates 3 maybe the convergence in yields is happening because all cities are becoming supply deprived in that case strong growth and generous lending will be key why might this be the case building has been much lower in affordable high yield cities since 2005 in this chart there are a few outliers well below the regression line those are contagion cities who were especially walloped by the financial crisis phoenix las vegas orlando etc other cities have a quite high correlation building has been low in affordable cities i attribute this to tight lending these cities tend to have lower incomes and because of this rents have been rising broadly across msas recently rents have moderated or fallen in the low yield cities because of covid migration in any case less building could mean that buyers in all metros expect rents to be strong this can be seen in vacancy rates too vacancy rates have always been low in the low yield cities vacancies in other cities are declining too because of the lack of building https fred stlouisfed org graph g eu8h of course i would expect some combination of 2 3 surely there is some sensitivity to real long term interest rates the questions are how sensitive home prices are to interest rates how that sensitivity might differ across cities with different supply elasticities and how much tight lending standards may have altered that sensitivity i thought there might be more anomalous movement among msas in the recent market activity austin for instance might have seen an unsustainable decline in yields as the contagion cities had before 2006 because of a big migration shift i suspect that tight lending plays a role here in 2003 2005 migration led to more building and possibly the migration was more targeted at certain cities than it is today but because entry level housing is greatly obstructed by tight lending and because of supply chain issues related to covid there hasn t been as much of a supply response in these markets recently so rents have been rising in cities that tend to take in more migration in recent years migration is pushing up prices but more so than in 2005 it is pushing up rents so the contagion cities aren t anomalies in terms of yield and since the migration is related to lower demand for closed access residency the closed access cities are experiencing some anomalous decline in yields but this is coming more from declining rents than from rising prices and will likely reverse or moderate as covid passes posted by kevin erdmann at 9 47 pm 45 comments email this blogthis share to x share to facebook share to pinterest labels fixed income housing sunday june 20 2021 interest rates and home prices a couple of quick thoughts on recent home price appreciation in graph 1 i estimate a national median gross rent price yield from zillow rent and price data i compare it to the 30 year tips real interest rate plus 8 certainly a case can be made that some of the recent price movement has been related to declining real long term yields however without more historical data this doesn t tell us much two measures both moved in a certain direction over a period of time and so it s easy to match them up on the y axis here is a longer series with similar measures here i estimate the national average gross rent price level with total rent total residential real estate value for owned homes i also used the cpi rent inflation measure with the case shiller national home price index with a scaling constant as a second version of the estimate both estimates of rent price yields follow similar trends here i use a 30 year tips bond issued in 1998 and then in more recent years the general estimate for 30 year tips yields here i only added a 3 spread to the tips yields part of the difference is that the mean yield is lower than the median yield price rent is not the same across the market it is systematically higher where rents and prices are higher part of the difference is that we imposed a one time shock on housing during the financial crisis adding a 2 3 spread on housing yields compared to other assets so the spread in the first graph from 2014 onward is much higher than it had been before https fred stlouisfed org graph g esse when i first started looking at these things years ago i excused the pre 2006 price increases with this relationship i still more or less stand by that it isn t controversial to say that home prices are related to interest rates in fact i think it helps clarify the analysis to show that it is specifically real long term rates that seem to correlate with housing yields but even in 2005 that doesn t tell the whole story rent price yields are not uniform across cities they decrease systematically where rents are high some of that might be attributed to expectations of future rent increases some of it might be attributed to lower cost of ownership where rent is a product of location rather than structures and services in any event before 2000 gross housing yields had been between 6 7 for some time and after 2000 they continued to be in that range in most cities in some cities like la or nyc they declined to more like 3 4 the aggregate yield around 5 was an average of a country increasingly becoming bifurcated into at least two different stories so it may be that the correlation between 30 year tips and housing yields from 1998 to 2008 overstates the relationship in most places the gross housing yield didn t decline as much as the 30 year real rate yet even if one assumes that a 2 spread remains in place between long term real rates and housing yields the recent drop in real interest rates is enough to support recent home price increases even if the relationship is slight actually i think the causality may go both ways a bit in other work i have mentioned that housing used to be cyclical in terms of quantity and now because we have obstructed construction so much it is cyclical in terms of price it is hard not to notice a similar regime shift in interest rates before 2000 real interest rates were relatively stable and changes in interest rates were largely related to inflation expectations since 2000 real long term interest rates have become strangely volatile in the mid 20th century housing yields remained stable because when rents increased a lot of new homes were built until rents declined again all those new units required capital mortgages construction loans home equity an increase in demand for investment in generally safe assets and securities drove gdp growth higher and put upward pressure on interest rates there is a lot of concern about a lack of safe assets which is driving down interest rates homes in california used to be safe assets they aren t any more they are risky investments in a cartel mortgages used to be safe assets for investment but many aren t legal any more so the trillions of dollars worth of new homes they would have funded which also would have been safe assets in texas nebraska and tennessee also don t exist so there is an interesting set of interacting variables here if inflation rises i don t think that will have much effect on real home prices or construction activity if real rates rise which will be associated with real economic growth and probably with a mitigation of short run inflation then it should have a moderating influence on home prices but unless mortgages can flow multi unit projects can be easily approved and construction can run hot then rents will continue to rise and long term real interest rates will continue to be limited in that case it seems like a hot market is likely to remain with housing growth but at historically low construction rates and high prices low housing yields while the hav...
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