patrick.net

DinOr, I see I sailed right past your point wrt HI. It seems to me, even out here in the hinterland, we haven't escaped without at least some of what you describe.

But do you think we are interested in permanence? Will all that stucco and tile be here for several lifetimes? Not a prospect I care to think about.

Randy, I still wonder how the BA can absorb that much REO without affecting the rental inventory. I certainly don't believe you're naive, and I can see several factors more or less specific to SFO militating against lowered rents. Annual rentals here rose for more than a year following the local RE collapse, but bloated inventory is having an effect, though only noticeable within the past month or so. I credit the REIC/prop mgt cos with keeping rents high during the interim, but property owners evidently can't bear the vacancies eternally.

Randy,

RE: a) When I first joined the blog (2+ years ago), I could probably have been included in the "it'll crash fast" crowd --a feeling which quickly faded the more I learned about past housing market corrections. By early '06, despite my own personal desire that it be so (so that I and every other shut-out responsible renter would be able to buy soon), I was *firmly* in your camp on this, and was predicting a 5+ year correction as very likely. Heck re-read my intro to FuckedCounty.com “dead pool” revisited (August, 2006).

RE: b) Ditto on the foreclosure process. Once I had done a little online research on the foreclosure process and heard from experienced industry people (like FAB, OO, etc.), I wholeheartedly agreed with you that this would be a "sticky" factor slowing down the inevitable market correction.

RE: c) About the only thing I *wasn't* 100% sure about was where rents would go, and I said so. I strongly doubted overall rents would shoot up above overall inflation, and speculated they might even drop some in areas with lots of specuvestor-owned inventory due to the "accidental landlord" factor (which is now being born out in severely overbuilt areas like Riverside, San Bernardino, Sacramento, etc.). However, I didn't pretend to know for sure what would happen everywhere.

Regardless, if rents are really shooting up faster than inflation all over NCAL, while wages are NOT, then that's very bad news, I agree. That's just not the case where I am, though (Pasadena area), and I live in one of the most supposedly "desirable" and densely populated parts of SCAL.

Let me repeat: GET OUT OF MARIN. It is obviously overrun by extreme NIMBY privileged Boomers and greedbag Trustafarian a$$holes who want *nothing* to do with the likes of people like you and me, and are demonstrating this to you every single day. Why trap yourself and your family among such horrible people? Is pretty scenery really worth all the expense and needless aggravation? There are better places for you out there, I'm sure.

HARM Says:

Yes, illegal immigration is a bit of a wildcard –especially in regions absorbing high concentrations of illegals, like CA, TX, AZ & FL. However, as high as the inflow is, it is *still* not enough to explain the astonishing 5-year run-up from a purely demand-for-shelter perspective.

i wasn't talking about illegal immigration alone, population growth in general. if the local economy is strong with growth in population, it may be good reason for the market to pick up based on fundamentals. it's more of prep work for future buying not for the current run up.

most booms start with basic supply and demand, with easy credit the housing boom took off. It morphs into self fulfilling boom (profits from real estate plowed back for a bigger boom) until people realize it’s out of whack.

HARM

If only...

We're here for quality of life reasons, believe it or not. Above all else, our family is sacrosanct. As my wife is an executive and works in Marin, we'll stay here to minimize her commute as long as necessary, even if it means renting. Luckily, my wife is actively working to move her department out of Marin back into the City, which will open up a lot of options.

Marin is heavily NIMBY ridden, but I wouldn't say any moreso than much of the Mid Peninsula. When I lived in Belmont that was even more NIMBY. What Marin does have is proximity to the City. And it was just ranked #1 best schools in the entire country. Every time something like that is published, the people here are even more certain that "it never goes down" here.

It's not all terrible here, by the way. I just like to bitch.

"most booms start with basic supply and demand"

Just as most "bull markets" start off with legitimate fundamentals! Then something... strange happens?

And it was just ranked #1 best schools in the entire country. Every time something like that is published, the people here are even more certain that “it never goes down” here.

Again, education is over-rated. Being able to get into an absolute top university will not guarantee success. Being able to get in even with horrible grades will!

People are still confusing cause with effect.

NIMBYism is the perversion of democracy. Given a choice, it is much better for a society to lean towards market-driven policies.

>> Again, education is over-rated. Being able to get into an absolute top university will not guarantee success. Being able to get in even with horrible grades will!

I highly recommend this book:

The Price of Admission
How America's Ruling Class Buys Its Way Into Elite Colleges -- and Who Gets Left Outside the Gates
By DANIEL GOLDEN
September 14, 2006

Every year thousands of middle- and low-income high school seniors learn they've been rejected by America's top universities. What they may never learn is that candidates like themselves have been passed over for wealthy students with lesser credentials -- children of alumni, big donors or celebrities.

"The Price of Admission" by Daniel Golden is an explosive book that exposes how America's richest families receive access to elite higher education -- regardless of ability.

It lays bare the inner workings of a system that favors the children of the rich and powerful, perpetuating privilege across generations and undermining the American dream of upward mobility.

Resulting from six years of investigative reporting by the Pulitzer Prize-winning journalist, "The Price of Admission" names names, schools, grades and test scores. Among Mr. Golden's findings:

• At least half of the children of 425 big Harvard donors who applied to the school were accepted, based on Mr. Golden's study of these donors. By contrast, Harvard only admits 10% of applicants overall. Separately, Harvard provides a special entrée known as the "Z-list" for well-connected but under-qualified students; they are quietly admitted on the condition that they wait a year to enroll.

• Princeton admitted Senate Majority Leader Bill Frist's son even though it gave him the lowest ranking on its academic scale. Sen. Frist is an alumnus, an ex-trustee and prominent politician -- and his family has donated $25 million to the school.

• Brown University sought to expand its Hollywood connections by admitting the son of powerbroker Michael Ovitz. Chris Ovitz was a mediocre student who'd been suspended in middle school for swinging a baseball bat at a female classmate. Even though he dropped out in less than a year, Brown still reaped the benefits: it snagged Ovitz pals and A-list celebrities Martin Scorsese and Dustin Hoffman at university events.

• At most colleges, the president and fundraisers funnel a "development list" of applicants from rich families to the admissions office for priority treatment. In addition, college presidents often have a powerbroker, a right-hand man to the president, whose responsibility is to usher children of the rich and famous through the admissions process.

• Children of key alumni and donors enjoy advantages every step of the way, such as extended application deadlines, personal interviews with admissions deans, "special student" status and deferred admissions.

"The Price of Admission" is not only a must-read for parents and students with a personal stake in the college admissions process, but also for those disturbed by the growing divide between ordinary and privileged Americans.

About the Author

DANIEL GOLDEN is Deputy Bureau Chief at the Boston bureau of The Wall Street Journal, where he has covered education since 1999. Previously, he was a reporter at The Boston Globe. The recipient of numerous journalistic honors and awards, including the Pulitzer Prize and the George Polk Award, he holds a B.A. from Harvard College. He lives with his wife and son in Belmont, Mass.

Also, it is notable that the richest people in the world tend to have honorary degrees or no degrees at all.

Given a choice, I much rather have a honorary degree than a real one.

Peter, I think the guys you are talking about get rich first and then get an honorary degree. I suspect that they basically purchase them, although my father received an honorary degree and never really amounted to much.

Peter, I think the guys you are talking about get rich first and then get an honorary degree.

That is what I meant. I want to get an honorary degree "the old fashion way." :)

Oh, I got a new one to share with you guys. I might have mentioned earlier on this thread, or the one previous, that my husband has a friend who is a mortgage broker who has a really ugly neg-am loan on his house.

Well it gets better. The guy is the branch manager of some local brokerage firm--he's been there 5-6 weeks. He gets a call today from his boss telling him that they're shutting the doors and everyone that works there is out of a job. Just like that. So he has to round up the 20-something people who work there, tell them to pack up their desks and that they don't work there anymore.

Yikes! I admit to a certain amount of schadenfreude, but I'm not even so cold that I'd be happy to see all these people suddenly jobless. I don't know how most of us would cope if our job just went *poof* in one day.

This mortgage guy isn't too bright though. He made a ton of money while the market was going good. He paid over $100k in cash on cars and bought a huge house with a stupid loan and now he has very little saved. They've already got the house up for sale, but it's doubtful they'll do any better than a short sale on it. I wonder how this is going to turn out.

Anecdotally, there are now 3 accidental landlords in my relatively small social circle in Alameda, CA, and all 3 decided to rent out there old places for the first time within the last 6 months.

Two of them bought >4 years ago, so it is likely that prevailing rents will support their mortgages. However, I get the impression that the rents they plan to ask are carefully calculated to just cover their mortgages--the landlord who has owned longest was asking about $1700, while the landlord who bought more recently is asking $2500 for a similar place.

One accidental landlord bought more recently and probably would be kicking in a bit extra each month and praying for rents to rise. The asking rent is pretty high for the area--no surprise there.

This kind of thinking seems to be leading to piecemeal rent inflation on Alameda. I am seeing some list rents up >50% on smallish single family homes in the 4 years I have been paying attention, and that sounds like a lot to me. But from there, asking rents go all the way down to our rental price of 4 years ago.

It will be interesting to see how this turns out. In my little corner of the world, rents have been held down by elderly landlords who moved to the island after WWII, and a lot of those folks are dying and leaving the property to younger family members. On the other hand, there is a lot of rental property coming on the market as owners decide that selling their house at these prices would amount to giving it away, and that rental property will keep them fed when they are old--but they want much higher rents than their predecessors. It's a question of whether these accidental landlords can convince the renting population that rents should increase, even as the number of available rental units increases. People are funny--they don't always do what makes sense.

The figures I’ve seen are closer to 80% “average” equity ownership. The problem with these computations is that homes with no debt are not accurately included in the statistics at market value, whereas homes that are financed are expressed closer to market value.

In other words, the little old lady who owns the 1962 ranch outright is included at her purchase price of $28,000, not at the current market value of $650,000 of equity value.

Actually, the way the Fed calculates the equity ownership is as follows.
1) Get the estimated market value of all residential real-estate in the US from some other Federal agency.
2) Get total amount of mortgage debt outstanding from the banks and other institutions, which must report this data to the Fed.

To get total % debt, you just divide (2) by (1), and then you subtract this % from 100% to get % equity.

In other words, the Fed figures DO take into account current market values. Indeed, it would be quite difficult to get the distorted number Randy H is referring to, because there is no record of this info. If someone purchased a house in 1962 at $28,000, there is no easy way to know this, other than by looking at local real-estate records. Federal statistics are all for current market value. Zillow apparently has done the hard work of looking into the local records, but this is a private database. You might argue that the federal values for current market value might be flawed, given how market value can fluctuate wildly in places like San Francisco. However, when you are aggregating over the entire United States, most of which does NOT have a house price bubble, I doubt this numbers are that far out of whack, and I also doubt they are much further out of whack today than 10 or 20 years ago. If there is an error, it is probably a consistent error. Meanwhile, the % equity has been declining steadily, accordign to the Fed calculations. I think the picture of what is happening is pretty clear.

There are only 2 ways for rents to go up:

1) Increase in wages.

We ARE seeing an increase in wages, at or slightly above the rate of inflation, and it is reasonable to see rents go up at that rate, more or less. Maybe you'll see some short-term spikes in rents, as supply and demand get out of sync, but the overall trend will ultimately return to the trend line of wages, unless we have:

2) Increase in population but no increase in rental housing stock for some reason (NIMBY'ism, for example).

We are also seeing an increase in population, but this is matched, more or less, by increase in rental housing stock in most areas. If it were not matched by such an increase in housing stock, then the only resolution would be for people to consume less housing. That is, if someone is making $2K a month and their rent rises from $1k to $2K, then the only solution is for them to find a roommate, or sleep in their car, or otherwise take a downgrade in the amount of housing they consume. You can't squeeze more rent from people than what they can afford to pay. Basic micro-economics.

House purchase prices, on the other hand, can increase for a third reason:
3) Borrowing to supplement wage income.

This borrowing is the real cause of our current house price bubble. But there is no way for borrowing to cause a rise in rents--no one is going to lend you a huge amount of money in order for you to turn around and give that money to a landlord.

It is conceivable that consumer preferences might change, such that people spend say 60% of wage income on rents rather than the usual 30%, and this would be another reason for a rise in rents, as well as purchase prices. However, such a change is a psychological change and likely to be very gradual. Also, I have seen no evidence of such a change in recent decades, though there apparently was some sort of change like this in the 1970's, associated with a variety of sociol changes (more single households, more married couples with no children, smaller families in general, etc) which caused people to gradually spend more money on housing versus other things (food, transportation, clothing, etc).

>You can’t squeeze more rent from people than what they can afford to pay. Basic micro-economics.

Lord knows they'll try though. 1999-2000 were painful memories of that.

Actually, the way the Fed calculates the equity ownership is as follows.

Actually, the Fed doesn't calculate home equity ownership at all, nor does home equity ownership count directly in the US GDP figures, in contrast with methods used in places like the UK. The Fed uses an inputed rent formula, which you can look up on the web, that is not quite so simple as you suggest.

I wasn't talking about Fed imputed rental equivalents anyway. I am talking about aggregate equity ownership, which is statistically computed from a number of primary-sources, including DQ data, industry reporting, and primary research. You can also google this data quite easily.

Btw, the Fed's way of imputing equivalent rents is hotly debated as terribly distorted for, among other reasons, failure to mark-to-market.

You can’t squeeze more rent from people than what they can afford to pay. Basic micro-economics.

Basic microeconomics 101:

* Rental markets are not _perfect_markets.
* Rental units are not perfect substitutes
* Rental units are not commodities
* Rental markets have timed price-contracts that cause price frictions
* Rental markets experience information asymmetry

I just pulled out my old Pindyck micro text from grad school and it has a whole chapter on rental-market economics, none of which is particularly "simple". Mostly there's all kinds of stuff about how interdependent elasticities are: that is rents can go up far faster than wages and inflation because the mere perception of rising rents will cause consumers to allocate more discretionary income to rents since rental demand is very rigid. There's also a whole bunch about supplier (landlord) clustering, where landlords will tend to adjust rents in large movements all at the same time.

Again, don't take my comments as any kind of current bubble price justification. I've put my money and family where my mouth is, now going on year 3 of renting after a decade of ownership. But let's not delude ourselves either. Incomes are rising at the fastest rate since the late 90s, corporate earnings have just come off the strongest 5 years since WWII, and the BA is attracting quite an impressive influx of new workers for the first time since 1999. We should not expect anything but for rents to climb. They won't climb enough to justify buying a house anytime soon unless house prices also come down. But be prepared, the delta "rent advantage" will now deteriorate from year-to-year.

That's called a correction. It don't happen overnight in real estate. It may well take a number of years of both downward house prices and upward rents.

"The Price of Admission"

How disgusting. What paranoia. "If my kid doesn't go to a top tier school and get hooked up for life how can my financial empire/legacy live from beyond the grave?" What useless pr!cks. Just what the world needs more of.

I especially like the kid that took a swing at a defenseless GIRL with a BASEBALL BAT! Classy guy. Look for this @sspray on "The Smoking Gun" mugshots in the near future. Ya think this "switch hitter" has issues? Entitlement issues? Nah...

@SQT,

I expect regular updates on that "situation". Weekly reports would be nice. No guilty pleasures here.

How in God's name can anyone employed there claim they were "blind sided"? Try blind. Sorry, when Patrick (St. Patrick, excuse me) first started grappling with "is it bigger than a breadbox" Yeah... it may have been premature to short subprime lenders. 2007? C'mon, that's just laughable. Add that to the already bustin' at the seams SAC inventory.

Randy, very well stated.

DinOr

Yeah, it's not exactly a strong market out here.

We drove through one of the more "exclusive" neighborhoods today and boy was that interesting. The homes are on a golf course so everyone thinks their homes are friggin' priceless. But there are literally 2-3 models that are prevalent throughout and every one's home looks exactly the same. The lots aren't even that big.

And there are tons of homes for sale in there. Several appear to be in foreclosure as they are totally untended and the lawns are brown and overgrown. There are even great big 'open house' banners on some of the fences. It's amazing. And yet some idiots think they can ask 1million for these homes and they are not nearly worth that in our market. I can go to a nearby neighborhood and get a house the same size with a bigger lot for less than $500k, so why on earth would I pay a million to be on a second rate golf course?

I think my area is going to literally be a bloodbath by the end of the year.

NIMBYism is the perversion of democracy.

Uh, it's democracy at its best. Local citizens participating in their local governments.

"pay a million to be on a second rate golf course?"

Good question! I remember as the "tech wreck" wore on, brokers were walking away from their "exclusive club" memberships in droves. Many had waited years to get an opening or approval only to have to bail when times got tough. I think what we're seeing now will dwarf that! Good-bye gated, "upscale" community, we'll miss you.

Here is an article in the nytimes illustrating how the highly desireable markets are still strong even while the bottom weakens
http://tinyurl.com/32vyf6

* Rental markets are not _perfect_markets.
* Rental units are not perfect substitutes
* Rental units are not commodities
* Rental markets have timed price-contracts that cause price frictions
* Rental markets experience information asymmetry

Agree whole-heartedly with all but #2, and I think #3 is missing the point.

How is renting a whole house identical to your FB neighbor's house not a "perfect substitute"? You both have an identical house with identical (or near-identical) amenities, your kids go to the same school, you both have the same-sized yard, garage, etc., etc. If you are comparing an apartment to a house, that is simply not a valid comparison --apples to oranges. Rent-vs-buy cost comparisons must be comparable properties or the comparison is useless.

Randy, were you being smart with that "rentals aren't commodities" comment? Please, of course they're not *exactly* interchangeable commodities, and neither are for-sale houses, or cars, clothing, etc... There will always be quality, size and geographic differences, no matter how "liquid" or transparent the housing market is in a given area.

It still doesn't mean LLs can demand any arbitrary price they want, or that the basic pricing mechanism of supply & demand has been repealed. As has been pointed out here countless times (most recently by vagrant), the Fed & Wall Street cannot artificially pump up rental costs with cheap debt as easily as they can house prices ("yet").

Again, it sounds like Marin has a very *inelastic* supply and ridiculous NIMBY/Boomer/Trustafarian restrictions that prevent any new stock being built, which naturally gives anyone who lives there (you) the impression that it's like that everywhere. It's not --really and truly. You say it "isn't that bad" and I totally understand the need to minimize your wife's commute, but I honestly think you'll be much happier and better off once you're out of there.

Pretty scenery + nasty, greedbag Boomers & NIMBY Trustafarians = no quality of life for working class Gen-X or Gen-Y.

HARM

I wasn't referring to Marin exclusively. Rents are going up on the Peninsula, in the City, and South Bay too.

Commodities refers to the glib "simple microeconomics" stuff people throw out there to sound smart. There are almost always referring to college econ 101 stuff where all analyses are assumed for *perfect* markets, where products are *perfect* commodities. Like stocks or wheat futures. For things like cars, apartments, houses and milkshakes that "simple microeconomics" ain't so simple.

The price curve isn't straight, the slope isn't constant, the effects aren't linear. Everything you say is true, but as a gravitational constraint, not as an absolute constraint. Rents will tend to orbit around the fundamentals you describe, not ride directly on them.

And, I was referring to apartments not being perfect substitutes for other apartments, not betwixt housing.

But now that you mention it...

A rental SFH home which is rent-able at a good value (not a FB need-my-mortgage-payment price) is practically _never_ an equal substitute for the same size, location, school district and neighborhood house. The reason is simple. If you want an example why I invite you to my rented McCrapsion for a beer (seriously) and to take a tour of the oldest, cheapest, least efficient, leakiest and loudest appliances ever manufactured by mankind. Seriously, you cannot generally rent equivalent quality from equity-rich reasonable rental (professional or long-time) landlords.

Again, man, I'm not saying housing won't come down. It will. It is. Even here in Marin, despite media reports to the contrary. *But*, rents are going up too. They won't double. They might not even grow 50%. But they are going up at a healthy pace. Just be prepared for realtors and the REIC to use that to try to scare up a band of buyers this fall.

*They are almost always referring to ...

@HARM--
I do rent, and I plan to rent for awhile, but renting is not the same as buying. You know, intangibles. Typically you cannot make major modifications to a rental house--no cat door, no painting the outside orange, and if you don't like the electric stove it doesn't make much sense to run a gas line and buy a new gas range. You probably wouldn't invest time/$ in major yard and garden projects, which may mean you don't live with the yard you want. And if there are not a lot of comparable rentals in your area, there is a slight risk that your kids might have to change schools suddenly if the landlords decide to sell or move back or die or whatever. So, you know, you do give up something in order to rent. It is not a perfect substitute for a house you own with the bank--the difference is the right to make decisions about the house itself, and we each get to decide how much those decision-making rights are worth to us.

On the flip side, renters can move on a month's notice, generally. Not so if you own your house with the bank.

Randy, despite your observations - all of which I agree are sound - I will not be surprised to see rentals to fall where you are within a year or eighteen months. I've noticed that when available rental inventory swells to about three times historic norms, the prices come unstuck. It took a four-fold increase here, but it's showing up now.

Which is not to say rentals didn't rise in the interim. They did.

For me, the easy part of renting a great place was finding it - always late in a downturn. The tough part theoretically is JBR status which of course I'm just fine with.

Eliza & Randy,

Ok, I guess I've been unusually lucky with finding decent rentals and above average LLs. Or, perhaps I should say I'm good at finding them, as I usually spend 1-2 months of careful looking and I never settle for just "ok" when I have the option of taking my own sweet time.

My last LL (12 years in the property):
--Over the years has installed a new AC unit, new stove, new carpeting, new bathroom, kitchen tile & fixtures, and rarely delayed in fixing stuff, or gave me guff about it. In return, I paid on time, took excellent care of the place, even made a few modest upgrades, and didn't create any unnecessary problems for him.

My current LL (going on year 1):
--Before I saw the place had upgraded most of the light fixtures and major appliances, refinished the hardwood floors, and did a beautiful job with the landscaping. While I've been here he has replaced a broken window pane (previous tenant) and replaced a broken kitchen faucet (wear 'n tear) without hassle. I re-painted and redecorated the bathroom to my liking, and he has told me I can paint whatever room whatever color I like.

I know, I know, you can't *choose* the major appliances supplied by Mr. LL, and you can't take them (or any other upgrades) with you. This much is true. Ditto for people with school-age children. Being forced to change school districts is a hassle, I agree. However, as Eliza pointed out, as a renter you get:

--greater physical mobility
--greater financial flexibility (not being 100% invested in one illiquid asset)
--no resale or rate-reset risks (being underwater and unable to sell and/or being imprisoned in a suicide mortgage)
--fewer responsibilities & downside risks ("So the house is sliding off its foundation and your insurance doesn't cover it? Sure sucks to be you --I'm outta here.")

I never said there were *no* advantages to owning vs. renting. Just that some people tend to grossly *over*estimate the "ownership premium" while *under*estimating the comparative advantages of renting.

I think it all boils down to that fundamental bias in favor of "ownership" we've so often discussed. The need to "own" (whatever that's really supposed to mean) is so powerful in American society, it often blinds us to the alternatives.

And what do we really "own" in the long run? Does "owning" a mortgage on a bank-owned property make you better than someone who "owns" a rental agreement? Do you get to take the place with you when you move, or just the memories you have of living there?

Maybe I'm getting a little too Zen here, but I think sometimes it helps to step back and take stock of our priorities and the assumptions behind why we do what we do.

Casey S. mentioned to me in his travels that he'd heard the bank actually owned your house when you mortgaged in Oz -- I said I think not, a mortgage is a mortgage wherever you are, it's just one of those offhand remarks or misconceptions people have... 'Shared equity schemes' with the banks, on the other hand, are one of the proposals on the table akin to 50 year mortgages and other delightful solutions the banks have come up with to help you into home ownership after offering easy credit for the past few years thus triggering the housing boom and a record foreclosure rate... So effectively the bank might end up owning a fair chunk of your house and you're really just renting the property from the bank for the rest of your life -- oh well, can't help markets...

I wasn’t referring to Marin exclusively. Rents are going up on the Peninsula, in the City, and South Bay too.

Interesting that rents appear to be going up, even in a time of apparent over-supply of rental housing. This tends to predicate away from the 'supply-demand' model of pricing, to the 'landlord desperation' and price-fixing model that I suspect is closer to the reality, much like in the owner-occupier real estate market. And I would endorse the cluster effect mentioned earlier in the micro textbook as outlined below...

Rents started to creep up here a few months ago, and I fought a 25% (35% over 12 months) increase in my last place through a court Tribunal process, engaging a barrister and a solicitor in the end -- more on this exciting process later if you want to find out how the system protects your tenancy rights. The state-based REIs (peak bodies for LLs and REAs) sent out notices to all their members managing properties encouraging them to push up rents as 'vacancies are historically low' -- around 1.7%, apparently. I'm not sure I even believe the reported vacancy statistic -- I think it's more likely we are seeing too many recent property investors being burnt as the market turns -- the expected capital gains aren't there, so in desperation they have to up rents -- and the RE agents who conned them into buying at the top of the market are only too willing to assist in achieving it to save face and gain even more revenues in management fees. So we see booming housing prices followed by a bust -- and as the bust occurs, rents ineluctably increase.

Randy H says:

Actually, the Fed doesn’t calculate home equity ownership at all, nor does home equity ownership count directly in the US GDP figures, in contrast with methods used in places like the UK. The Fed uses an inputed rent formula, which you can look up on the web, that is not quite so simple as you suggest.

Visit www.federalreserve.com and look at the Z1 report, balance sheet section. %equity is defined in the B.100 table as: (market_value - debt) / market_value. There is nothing about imputed rents.

The Fed does not calculate market_value of residential real-estate, but either the BEA or Census Bureau does.

Imputed rents are discussed by the Fed Governor at every single meeting.

http://www.federalreserve.gov/BOARDDOCS/HH/2006/july/testimony.htm

I turn now to the inflation situation. As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities and, in particular, to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of non-energy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents, as well as in the imputed rent on owner-occupied homes, have recently contributed to higher core inflation.

zeke,

Get with the program. We discussed that article already.

Inflation is up here on a range of fronts also - and I believe the Treasurer and Bureau of Statistics find ways to under-report true inflation, by pricing out so-called 'volatile' things like fuel, and various foodstuffs, and possibly by just plain-out cheating the figures or modifying measures. However, I believe real inflation is 8-9% p.a. as the American shadow govt statistics website www.shadowstats.com indicates. Ditto for real unemployment and underemployment. GDP figures and the notion of 'economic growth' are just misused and abused to falsely report a 'successful' economy.

Some pensioners here kept receipts for a number of years and basically proved 8% inflation per year for the past 2 years on their own 'basket of goods'.

The reality here is that people are not sharing equally in the wealth of the commodities boom either, a few people at the top are keeping all the profits and bidding expensive RE up even higher as one outlet, while wage workers are forced to take 2-3% wage increases every year and can barely make ends meet -- it's for this reason that people don't believe the good news stories, and John Howard is currently on the ropes in the polls coming into the next election.

Randy H said:

Imputed rents are discussed by the Fed Governor at every single meeting.

Whether or not they are discussed by the Fed, imputed rents are NOT how the Fed calculates % equity and the Fed DOES calculate % equity. Go to www.federalreserve.gov and look at the Z1 report, specifically the b.100 balance sheet table. There you will see the %equity figure and also footnotes explaining how it is calculated, and the calculation is just as I explained above.

Imputed rents are used in a number of contexts, such as the national income accounts at the BEA and also to estimate CPI inflation, which is done by the BLS. Obviously, the Fed uses this information computed by other federal agencies. But neither the Fed nor anyone else can use imputed rents to calculate %equity. It makes no sense whatsoever.

The Z1 %equity figures is the source for the calculatedrisk graph of %equity dropping over the years. An even more shocking chart of %equity can be made by assuming market values of residential real-estate gradually return to the trend line of the last 30 years. The result is %equity dropping down to about 30%, depending on how fast the return to the trend line occurs. Given that many homeowners have 100% equity (no debt), this implies that many or most homeowners would have essentially no equity in the event of such a return to the trend line. More likely, there will be a wave of bankruptcies combined with a consumer savings spree, to bring the %equity back up to near 50%. That bodes very ill for the future of a consumer-based economy, unless the Federal government runs deficities the likes of which we have never seen before.

NIA are the principles and measures by which GDP is computed. Refer to Mankiw et. al. for definitions.

But more to the point, I let this debate stand as yet another example of how the rational perspective that housing is in a price bubble so often becomes a competition of "who can be more doom and gloom".

I entered into this because it was uttered above that "it's simple microeconomics 101". OK, now we're arguing about what constitutes aggregate GDP within the framework of national income accounts, which is neither simple nor is it microeconoimcs.

Just because there's about 20% more equity owned by home-owners than the scarier bear blogs claim doesn't mean that house prices won't correct. Similarly, just because rents are starting to rise healthily in some markets doesn't mean that house prices won't correct.

Over a year ago I was having the same kind of argument about house-price stickiness. I seem to recall a particular blog bully named "Allah" who authoritatively proclaimed that there could not ever be any house price stickiness, and anyone who thought otherwise must be a 'sheeple'. When I disagreed he called me a Realtor. Hey Allah, is it not-sticky yet?

To point: Foreclosure does not equal Bankruptcy. You realize that nearly all states have laws that protect non-house assets from foreclosure action, right? A wave of foreclosures would suck. It will hurt lots of consumers. It will destroy creditworthiness. It may even cause a recession.

Just not the end of the US consumer economy. Despite what Peter Schiff may say. He's entertaining though. Kind of the Ed Yourdon of finance.