Rental Costs Going Higher Despite Housing Glut

The WSJ reports that since April 2006 the cost of renting a house is up 12%. The natural tendency of people to defer purchasing a home in uncertain economic times as well as the conversion of owners to renters as the walked away from their homes has led to increased demand for rental property and a consequent increase in rents.

From my perch in Arizona I’m a bit surprised by this bit of data as rents have been under some pressure here. A couple of thoughts occur to me.

One, the article points out that the national average 12% increase is not necessarily reflected in all markets. States that have led in foreclosures have an oversupply of homes and consequently haven’t seen rental increases. I think it would be interesting to see the data broken down on a state by state basis. I  suspect that we might see that those states which have avoided the more deleterious effects of the recession and maintained a reasonable economy and job market have been the drivers of the increase in rents as workers migrated in searching for employment.

The WSJ article also points out an interesting statistical consequence of the increase in rents:

Rising rents also have implications for the meaning of U.S. price data. Rent, including an estimate of rent for homeowners, makes up nearly a third of the consumer-price index. Excluding rents, consumer prices fell at an annualized rate of 0.25% in the three months ending July. So one of the main price trends keeping the U.S. out of deflation stems from a weak housing market, not from a recovering economy.

One of the pernicious effects of deflation is that it dampens demand as consumers defer purchases in anticipation of lower prices. It would seem that housing is not necessarily the sort of good the purchase of one would tend to defer or accelerate based on the outlook for inflation or deflation. The need for shelter, particularly for a renter, is immediate. Thus, rental costs or owners equivalent rents are not necessarily something that is going to impact consumers actions.

If that’s the case then a deflation mentality might be more prevalent than we would assume based on official estimates of CPI. I tend to favor the explanation that weak retail sales are more a function of an increased propensity to save and financially distressed consumers, nevertheless, if price deflation from the consumer’s perspective is their reality then we might be uncomfortably close to self-reinforcing deflation.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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