So owner equivalent rent is a homeowner’s knowledge of the rental market? Seems like a crazy way to measure something, but the two measurements are similar. They are up 60% and 66% in the last 10 years.
Bugs, I also find it implausible that rental rates would climb at double digit rates. Rents track wages as far as I know, and something that I need to confirm. When rents exceed wages, people exercise their options and leave town, as they are already doing. The Fed Sept. 04 study concluded that price/rent ratio would normalize by prices stabilizing, not by rents rising. In my bearish view, I’d say by prices dropping.
I agree with Bugs that interest rates can rise. Some good arguments have been made for a rate as high as 15% of more in a few years, as we need to make our interest rates attractive to retain the $1.5 TRILLION of foreign investment in our country. If foreign conservative investors like insurance companies start to worry about the dollar losing value and pull out even a tiny bit of their holdings, like 10%, it would have a catastrophic effect on our economy. So the Fed has to keep the interest rates and dollar high enough that we are more attractive than other options, and with the Europeans now raising rates, it’s getting tougher. Inflation is also getting higher, and with rents rising, CPI has to keep going up (rents are 40% of the CPI).
As far as prices being down 20% nominal, we’re half way there and we haven’t even hit the loan resets yet. I’m excited for the big drops when the loans reset, in 2007 – 2009.
Bugs, thanks for the GRM explanation. I think jg annualized it because the OFHEO data is quarterly.
