The Big Picture has a post this morning suggesting cheap money and slack underwriting put renters into home ownership, and as these owners are foreclosed on they will be returning to rental status. The residential rental market is already fairly tight, and if this shift occurs here is the feedback cycle:
1) More rental demand equals higher rents.
2) Higher rents mean an increase in the CPI. Housing is by far the biggest component in the CPI, and the CPI calculation is based on rent levels, not house values. The CPI did not pick up the escalation in house prices because it focuses on rents and rent increases didn't keep pace with escalating house values. As rents increase the CPI will not pick up the falling house prices.
3) Higher inflation will put upward pressure on interest rates, exacerbating the housing crisis.
There's a scary feedback loop for you.Ultimately, an equilibrium will be reached as investors buy foreclosed houses at prices which can be supported at market rent levels. That equilibrium is probably years away.
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