gzz Comments on Rich’s new article

[gzz]

Asking rents rose by 9% in our July-July period, which is a lot, but is dwarfed by the 20% rise in home prices. In San Diego, asking rents rose 12% against the 28% increase in home prices

Some reasons for this that don’t imply prices are overshooting rents:

1. Rents are stickier than residential prices. Both are on the sticky side, with mortgage appraisels an example of a price-only factor.

But rents are literally 100% sticky for a lot of people because they are fixed by contract, as in 12 month leases. Some also have built in annual increases, which are certainly not going to be in the 28% YoY range.

2. Rent increases are legally limited. In San Diego the restriction isn’t too intense, I believe 60 days notice for an increase of more than 10%. Nonetheless, the restriction exists.

3. The eviction moratorium shifted the legal landscape against landlords. Landlording involves a small risk that a tenant will become a costly disaster who stops paying rent, trashes the place, and fights eviction.

4. Low stakes. Raising rent can always be put off till next year at fairly low cost. $1200 less rent over a year on a property that appreciated by $300,000? Who cares! Taking lower than market rent can and often is a combo business decision, lifestyle decision, and small act of charity and goodwill in a way that selling for 10% under market in a hot market never will be.

Of course these factors primarily apply to current tenants, and can be worked around by looking at asking rents for vacant units. But they still matter: if rents are below their “economic value” set by supply, demand, and the alternative of buying, current tenants will sit tight and not enter the market for vacant units.

Shorter version of my thesis is that a large number of sticky price factors, not just the four above, mean that rents simply never make the dramatic moves price do. The corollary of this is that prices could go flat for 3 years, but rents would likely keep rising at a moderately fast clip until they more or less match the price increase.

The best evidence of my thesis that rents are temporally below market clearing prices is that there is a shortage of them. And it certainly seems that way, my co-worker who recent moved talked about tons of people showing up to rental open houses and offering more than list price. Published vacancy rates are very low too. A gigantic LA complex I am familiar with from work is exactly 1% vacant despite raising asking rents by about 60% over the past 8 years.

[Rich Toscano]

I agree that rents in the CPI (which measures what landlords are getting on average) is way understated, for all the reasons you cited. This is why I cited asking rents for newly available properties as the comparison. I believe that nullifies 1-3? Maybe not 4 though.

[sdrealtor]

Rich I beleive the asking rents you posted (you can correct me if Im wrong) are for large complexes which dont wait until next year. They are always on the bleeding edge of rising or falling rents so I think that takes care of #4 also.

[gzz]

The idea here isn’t to argue that rents are currently not keeping up with prices. The data is what it is, and I don’t have reason to doubt it is basically right.*

My point is that relatively slow asking rent growth “only” in the low double digits isn’t a sign that prices are excessive and overshooting rents. The article’s comparison of them suggested otherwise.

Rather, I think rents are temporally below their current equilibrium level.

*My periodic searches for rent data suggest the data quality is pretty low, with huge gaps from the various sources.

My guess is that Zillow will eventually have the best rent data, though the monthly rent estimates it sends for me on my condo have ranged from 2400 to 3500 in the last year, and swings wildly.

[gzz]

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we’ll ever get back to pre-COVID levels on a lot of these issues.

I think these broad “fun outside the home” areas that ranges from trips to France to Applebees, will never recover.

Older people, even fully vaccinated, are frequently afraid to resume these activities. Others don’t like the additional hassle, like covid tests before you can come home from a trip abroad.

And on top of just older people, you have a lot of younger people who consider themselves immuno-compromised, and young people who are in regular contact with elderly relatives.

Then there’s the labor shortage issue. Restaurants in general have worse service and higher prices than before.

Here’s one way the new “nesting in a bigger home” is permanent for me. I spent a ton of money setting up a full home gym. This has both saved me money on gym membership and transportation costs to get there, but permanently increased my demand for residential housing.

What percentage of the population will never go out to the movies again because they upgraded their home theater system with high end speaker and an 60-inch TV or even a projector setup?

[gzz]

The main point of contention is whether the recent rise in inflation will be temporary or more protracted.

You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.

That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.

The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don’t work that way.

Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent “creditworthy borrower’s” market. We are getting rarer, and savers are getting more common.

You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.

The idea that savers can say “Due to higher inflation, I won’t lend out my money unless I get a commensurable higher rate” just doesn’t fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn’t get his desired rate.

Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.

[sdrealtor]

[quote=gzz]

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we’ll ever get back to pre-COVID levels on a lot of these issues.

I think these broad “fun outside the home” areas that ranges from trips to France to Applebees, will never recover.

Older people, even fully vaccinated, are frequently afraid to resume these activities. Others don’t like the additional hassle, like covid tests before you can come home from a trip abroad.

And on top of just older people, you have a lot of younger people who consider themselves immuno-compromised, and young people who are in regular contact with elderly relatives.

Then there’s the labor shortage issue. Restaurants in general have worse service and higher prices than before.

Here’s one way the new “nesting in a bigger home” is permanent for me. I spent a ton of money setting up a full home gym. This has both saved me money on gym membership and transportation costs to get there, but permanently increased my demand for residential housing.

What percentage of the population will never go out to the movies again because they upgraded their home theater system with high end speaker and an 60-inch TV or even a projector setup?[/quote]

I cant begin to tell you how big the resale market is for unused home gym equipment. Much of it is given away or tossed within a year or two

[gzz]

None of these are predictions. (We think anyone who has a confident multi-year interest rate forecast is deluding themselves).

But you are making a very bold prediction. You outline four scenarios and their impact on affordability, one where they stay the same and three more where they go up by varying amounts.

You all but rule out what I believe is quite likely, which is rates go down.

I also, for the reasons above, think you may be implicitly dismissing the chance of higher inflation with declining or flat rates.

While I think the low inflation and low rates is most likely, high inflation low rates is an easy enough scenario to imagine: BIB and BBB both pass, the boom continues, incomes rise and partly bleed into higher prices, but partly are saved. Dem gains in 2022 are unlikely but possible, and I think would lead to an even bigger round of BidenBux that again is split between consumption and debt reduction.

This chart is illuminating.

https://fred.stlouisfed.org/series/HDTGPDUSQ163N

The cost of debt keeps going down, but it doesn’t matter, the quantity of debt demanded goes down even more.

[sdrealtor]

[quote=gzz]

*My periodic searches for rent data suggest the data quality is pretty low, with huge gaps from the various sources.

My guess is that Zillow will eventually have the best rent data, though the monthly rent estimates it sends for me on my condo have ranged from 2400 to 3500 in the last year, and swings wildly.[/quote]

Yes just like the sales data which may be even lower quality. But for rents they use big complexes that are homogenous units and about the best one can do. They dont sepak for the entire market but they are a good proxy and consistent over time which is much more than I say for sales data of heterogenous homes with complex terms more often than not inaccurately reported

Zillow will never have the best data. unlike sales there is no public recorded data on rents unlike sales. The big complex data is and always will be the best we can do.

BTW its ok to say I was mistaken from time to time you should try it some time

[gzz]

I cant begin to tell you how big the resale market is for unused home gym equipment.

Not for the high end of the market.

I think a lot of the “big market” for used home fitness is low quality stuff advertised on TV or sold at WalMart. People don’t end up using it because it is uncomfortable, wobbly, and hard on the joints.

I am tightwad, so I looked used before buying my $9200 elliptical (now $10,200). I really wish I could have gone with a cheaper model too, but I was used to a particular model that I used for years at 24 Hour Fitness and EOS, and everything else felt flimsy, shaky, and unable to let me go all out when doing interval training. This one here:

Precor AMT 835 Adaptive Motion Trainer

A lot of equipment hit the market at that time because of gym bankruptcies. It got snapped up in days, I know because I called the listings for multiple gym bankruptcy sales.

[sdrealtor]

You won’t see it for resale in areas where people don’t buy it as often like in OB. You should check up here. I see high end stuff all the time

[Escoguy]

[quote=gzz]

The main point of contention is whether the recent rise in inflation will be temporary or more protracted.

You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.

That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.

The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don’t work that way.

Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent “creditworthy borrower’s” market. We are getting rarer, and savers are getting more common.

You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.

The idea that savers can say “Due to higher inflation, I won’t lend out my money unless I get a commensurable higher rate” just doesn’t fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn’t get his desired rate.

Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.[/quote]

Going out on a limb here but I think 24-36 months out we could be setup for a meaningful soft patch with odd side effects:

Not sure there is any specific action a person can take other than to have some reasonable liquidity/reserves/open lines of credit: much of the stimulus funds are unspent but think by 2024 that is gone.

1. the supply chain issues will have worked themselves out, even PC demand is set to slump about 5% in coming 12 months heard on CNBC today
2. shipping costs will come back to historical trends
3. energy prices will soften (perhaps at somewhat elevated levels)
4. housing will enter a period of 3-5 years of under performance (mean reversion) 2023-2026 it may still be 1-2% nominal increases but likely below inflation (over 3 years could drop 5% adjusted for inflation).
5. unemployment will rise and stay below 2019 levels in tourism/restaurants
6. will hit some limits of government stimulus
7. USD will stay relatively flat with low interest rates (safe haven effect) but continued political infighting will prevent signifiant boost to growth via public investment
8. US growth may actually outpace China for a couple of years as China starts to show age from demographic shifts (10-15 years out it gets worse for them)
9. stocks are the hardest to predict as there has been so much obsession with the US market so momentum likely to continue, many international markets are more fairly valued but the momentum catalyst is often missing
10. Don’t want to make political predictions but if we don’t get better choices in 2024 (could be catalyst for meaningful volatility), revulsion at whoever is perceived as extreme could cause more damage
11. certain commodities (think coffee) may be the best investments (something like 1/3 of the Brazilian crop was wiped out in August and may take years to recover

In a nutshell, I’m not going to go hard on raising rents. I can be fine with lagging the market but having higher quality tenants. The more secure cash flow is more important than getting every last dollar. Content to play catch up as the occasional one opens up.

I put this out there as the rental income would potentially become the money I live on if I work less or retire. The predictability is more important.

[zk]

[quote=gzz]

The decline in spending on travel, entertainment, and the like is temporary, so the “nothing else to spend it on” effect has already diminished and will disappear entirely.

I disagree that we’ll ever get back to pre-COVID levels on a lot of these issues.

[/quote]

I think there’s an awful lot of pent up demand for such things. I and a lot of people I know are busting out of this confinement we’ve been enduring with renewed appreciation for getting out there and doing…anything but sitting around at home. I’m definitely spending on those things at a higher rate now than pre-covid.

[quote=gzz]

I am tightwad, so I looked used before buying my $9200 elliptical (now $10,200)…

Precor AMT 835 Adaptive Motion Trainer
[/quote]

Gym-quality ellipticals are built tough, and that should last you forever. I bought mine:

https://www.worthpoint.com/worthopedia/lifefitness-front-drive-elliptical-149194656

in 2006. I bought it used and I’ve been using it (very vigorously) 3-4 times a week for 15 years with not so much as a hiccup. Before I bought that one, I bought an elliptical at Walmart for $250. The frame snapped at a weld (during an interval peak) on the last day of the (30-day?) warranty. I don’t think those cheap ones are even really meant to be used seriously.

[carlsbadworker]

[quote=gzz]

The main point of contention is whether the recent rise in inflation will be temporary or more protracted.

You know I am on Team Transitory. My view that the Fed is doing a great job and should be commended is the true contrarian take of 2021.

That aside, I am dubious that moderately higher inflation will actually have any effect on interest rates. Not even a couple years of 6% inflation, which is very unlikely.

The old model where inflation and nominal interest rates moved closely in tandem was based on a world where the marginal and median dollar saved was from middle class families. That world is dead, replaced by our current world of extreme inequality and elite domination. And while a middle class family may decide to spend more if inflation is high and return on their bank account balances is low, the wealthy just don’t work that way.

Rates are low and will continue on a secular path even lower, real and nominal both, because demographic and technological change has resulted in a permanent “creditworthy borrower’s” market. We are getting rarer, and savers are getting more common.

You have savings to lend, but want stability, low risk, and liquidity? Take a number bub, nobody cares in 2021.

The idea that savers can say “Due to higher inflation, I won’t lend out my money unless I get a commensurable higher rate” just doesn’t fly. The marginal and median dollar saved is saved by someone with a high net worth who does not have a bunch of consumption he will substitute for savings if he doesn’t get his desired rate.

Negative real rates are our future, and negative nominal rates will be a regular thing too in a large and growing portion of the world.[/quote]

Very good points. I like it!

[gzz]

ZK your pic took me back, that looks like my favorite model from my college days in 1998-99.

I am happy to hear you have got so many years of good use, that’s my justification for spending $9200 on one. It was the last item I really needed for the home gym that will save me about $300 a year in membership fees, and which I will actually use more and not have to drive to. I also like having my own music with a Bose sound system, not the increasingly bad music at the gym mixed in with loud advertisements and repetitive instructions to always wipe down and download the gym’s app.

Nothing like being able to get a 3 hour workout and not have my knees and feed hurt the next day. Though after hitting my weight loss goal I have been focusing on upping intensity not time, so average 1.5hrs 3x a week now, and only go 3 hours about once a month.

[Author]

Posts