Surging housing demand appears to be continuing to reduce demand for rental units, weighing on the OER component of the CPI. Strength in housing demand is apparent in the recent data on mortgage applications for home purchases, wherein the four-week moving average is now at a record high, as well as the National Association of Homebuilders' latest housing market index, which in May reached its second-highest reading in five years. Meanwhile, rental income has fallen to about $147.8 billion from the peak of $186.6 billion in April 2002. When the housing market weakens, it will result in increased demand for rental units, hence boosting the OER portion of the CPI.
So the message in all of this is to understand the perverse logic of how the strong housing market is influencing the CPI and how it could turn if -- a big if at that -- the housing market turns lower.
Below is an excerpt from a 52-page study conducted by the Fed last April discussing the impact of housing demand on the OER component of the consumer price index:
Downward pressure on rental prices mainly resulted from an increase in demand for homeownership, which was spurred by historically low mortgage interest rates (see Figure 19). As housing starts and home sales surged in the recent recession and recovery, the national rental vacancy rate jumped from 7.8 percent in the fourth quarter of 2000 to 10.2 percent in the fourth quarter of 2003. This effect was compounded by the way owner-occupied housing prices are measured in the CPI. The CPI uses a rental-equivalence approach, measuring the value of the shelter services an owner receives from his or her home. Price movements in owners' equivalent rent reflect changes in prices of rental units that are comparable in characteristics to owner-occupied homes. Therefore, increased demand for homeownership put downward pressure not only on tenants' rent but also on owners' equivalent rent -- the largest component in the CPI.
The chart below, "Figure 19" referenced by the Fed above, helps highlight the impact. Note that when mortgage rates go up, demand for new homes presumably falls, hence boosting the demand for rental units and thus boosting rental costs and the CPI.
Source: Federal Reserve
P.S. Will you be there when Cramer makes his next move?
Strong brands and companies with vast market exposure can help bolster your portfolio. Jim was able to lock in a 64% gain by buying Ingersoll-Rand at $13 and selling at $22.50. Action Alerts PLUS members were the first to see these moves. Were you among them? Get Free Access Today!
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.
RSS FEEDS
PODCASTS
