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r 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 have nots who are under the tyranny sincerely exercised for the good of its victims will face rising rents i suspect that a construction boom would both lower rents and raise real long term interest rates but the boom must come first in the meantime housing is in a peculiar space where we should expect there to be some sensitivity to rising rates if the economy continues to recover yet also housing yields continue to retain at least a 2 spread to long term 30 year rates compared to pre crisis norms so that nobody should expect home prices to revert to earlier relative levels especially as rents continue to rise posted by kevin erdmann at 7 53 pm 49 comments email this blogthis share to x share to facebook share to pinterest labels fixed income housing monday march 22 2021 brig burton and carly burton again i have good news or at least not bad news i guess i sold my business to brig burton in 2010 he ended up defrauding me in that transaction i had to sue him i previously mentioned the burtons here the key part i had to sue him in civil court in order to get fully paid for the business the judgments i was granted against him included fraud and conversion he appealed the rulings and the appeals court upheld them including the punitive damages that were assessed the appeals court confirmed that based on the record in this case the jury could have found by clear and convincing evidence that burton s conduct was aggravated and outrageous evincing an evil mind therefore we decline to set aside the punitive damages awards anyway i thought i was through with them but the burtons sued me after i posted that post we were able to make them to post a bond so that when the judge dismissed the case which she eventually did the burtons would have collectible funds to use to pay my legal expenses which the judge also ruled they had to do brig seems busy lately for example here https www bizbuysell com business broker b a burton green tree alliance 31184 and here brig burton business growth leader worldwide nationaldiversified com update posted by kevin erdmann at 1 10 pm 82 comments email this blogthis share to x share to facebook share to pinterest tuesday january 5 2021 december 2020 yield curve the yield curve looks pretty good long term rates still are recovering the expected date of the first short term rate hike also appears to be coming closer this all seems like good news to me all in all pretty good monetary management for the covid 19 recession i think it seems to me that a short position in early 2023 eurodollar contracts has a nice risk reward balance not much room for downside declining interest rates but quite a bit of room to run higher higher interest rates posted by kevin erdmann at 11 32 am 53 comments email this blogthis share to x share to facebook share to pinterest labels fixed income monetary policy thursday november 12 2020 october 2020 inflation update i haven t updated the inflation numbers for a while covid 19 has probably made it difficult to say too much because there are so many compositional shifts in the demand basket but i think it is worth taking a look at what is happening in rent inflation much of the drop in the stated core cpi number is coming from declining rent inflation or shelter inflation core inflation excluding shelter is still below 2 so the fed has room to goose spending within their mandate trailing 12 month shelter inflation has declined from about 3 4 to 1 7 since the covid 19 outbreak and the run rate may not be positive real time data suggests that much of this appears to be related to some amount of exodus from expensive cities like san francisco and new york city however declining cpi measured rent inflation is pretty evenly distributed among the major metro areas there are three periods of sharply declining rents in this period and it is interesting to compare them in 2002 2003 construction was hot and new supply was bringing down rents in cities with elastic supply dallas and atlanta but not new york and la then from 2008 2010 the foreclosure crisis and the sharp tightening in lending markets created a negative demand shock for shelter driving down rent inflation everywhere that was associated with very low rates of construction now the decline in rent inflation is associated with low but moderately rising construction activity if that continues it would suggest that lower rent inflation is mostly due to income shocks and the specific character of the covid 19 context where landlords may be opting for more leniency until the market settles if there really is a persistent shift of housing preference into less dense cities and housing units then that should be associated with rising demand for shelter and more construction not lower rents in that case there would be a compositional shift out of the expensive cities and rent inflation might decline as tenants leave the expensive cities pulling rents there down and move to cities where new demand is met by supply rather than price inflation the fact that rent inflation is currently declining in cities like phoenix which we should expect to be the destination for some of those moving tenants suggests that income shocks are more important now than inter msa migration posted by kevin erdmann at 1 02 pm 94 comments email this blogthis share to x share to facebook share to pinterest labels housing monetary policy older posts home subscribe to posts atom buy my books shut out how a housing shortage caused the great recession and crippled our economy building from the ground up reclaiming the american housing boom pages home a slide deck on the bubble and 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