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.
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